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 states 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 states 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, oras is often the casea 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 capacitythat 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.
Evaluating Business Tax Credits: Reading Between the Lines
by Jennifer Weiner
NEPPC Policy Brief 10-1
Discussion Paper: State Business Tax Incentives: Examining Evidence of their Effectiveness
by Jennifer Weiner
NEPPC Discussion Paper 09-3
The Fiscal Capacity of New England
by Matthew Nagowski
NEPPC Policy Brief 07-4
To review other Center research about state and local public finance, please visit our research index.