The Performance of State Tax Portfolios During and after the Great Recession

Abstract

State tax revenues continue, since the Great Recession, to experience elevated volatility relative to previous decades. The elevated tax revenue volatility is due to both economic uncertainty and the riskiness of the tax portfolios state governments are holding. Since the Great Recession, 18 states have increased the riskiness of their tax portfolio. However, many of these states were constrained to accept additional volatility in exchange for additional tax revenues. The mean-volatility constraint state governments face depends on numerous tax system characteristics. For example, states that tax groceries under the sales tax base and have less progressive income taxes are able to increase revenues and accept less volatility than states that exempt groceries from their sales tax base and have a progressive income tax.