New England Public Policy Center Working Paper No. 06-2 (A joint report with the Urban-Brookings Tax Policy Center)
by Yesim Yilmaz, Sonya Hoo, Matthew Nagowski, Kim Rueben, and Robert Tannenwald

States and their local governments vary both in their needs to provide basic public services and in their abilities to raise revenues to pay for those services. A joint study by the Tax Policy Center and the New England Policy Center at the Federal Reserve Bank of Boston uses the Representative Revenue System (RRS) and the Representative Expenditure System (RES) frameworks to quantify these disparities across states by comparing each state’s revenue capacity, revenue effort, and necessary expenditures to the average capacity, effort, and need in states across the country for fiscal year 2002.

The fiscal capacity of a state is the state’s revenue capacity relative to its expenditure need. A state with low fiscal capacity has a relatively small revenue base, a relatively high need for expenditures, or—as is often the case—a combination of both.

The New England and Mid-Atlantic states tend to have high revenue capacity and low expenditure needs compared to the national average. Thus, states in these two regions tend to have high fiscal capacity, or a relatively high capability to cover their expenditure needs using own resources. South Central states, on the other hand, have low fiscal capacity—that is, a low level of revenue-raising capacity given what it would cost to provide a standard set of public services to their citizens.

Little relation exists between the amount of federal aid received by states and their fiscal capacity; federal money is not primarily distributed to offset differences in the ability to raise revenues or provide services. Given the current level of federal funds allocated to state and local governments, 91 percent of the gap between revenue capacity and expenditure need across the states could be covered if federal funds were reallocated.

JEL Classifications: H71, H72, H73
Keywords: state and local government taxation, state and local government expenditures, interjurisdictional differences

Full-text paper

Supplementary Datasets

Fiscal Capacity 2002 Index Measures

Representative Expenditure System 2002 Dataset

Representative Revenue System 2002 Dataset

The paper, along with an associated map and charts, is available from the Tax Policy Center at the following link:

http://www.taxpolicycenter.org/newsevents/events_fiscal_disparities.cfm