Revenue-raising Capacity Research Articles

Local Fiscal Response to State Preemption: A Case Study of Massachusetts’ Proposition 2½ Tax Referendum

Abstract State preemption in the form of tax and expenditure limits significantly limits local revenue-raising capacity. To gain insights into how local governments respond to fiscal preemption through direct democracy, this study focuses on tax referenda that override the levy limit set by Proposition 2½ in Massachusetts. Analyzing a sample of 320 municipalities from 2010 to 2021, we investigate the influence of fiscal slack resources and tax burden on the levy limit overrides and exclusions. Our analysis breaks down the tax referendum process into two stages, highlighting the involvement of different decision-makers: local officials proposing the referendum and individual voters approving it. We find that municipalities are motivated to seek tax referenda due to diminishing fiscal slack resources, yet the tax burden on residents can discourage such pursuits.

Fiscal disparities among local governments in Zhejiang Province, China

ABSTRACT Although nearly all local governments in China face serious fiscal challenges, fiscal pressures on some local governments are more severe than on others. Using data from 2011 through 2016, this paper measures the relative fiscal condition of local governments in a single Chinese province as a means of quantifying fiscal disparities within the province. We measure the fiscal gaps between local governments’ expenditure needs and revenue-raising capacity. Expenditure needs are estimated using a regression-based strategy to identify a set of characteristics of each local government that influence the costs of delivering local public services. We measure own-source revenue-raising capacity as a function of both local GDP and actual local government revenues. Although fiscal disparities remain, they are substantially reduced after the receipt of equalizing intergovernmental transfers. Because per capita transfers to rural local governments are much larger than transfers to large city governments, post-transfer fiscal health is actually weaker in the province’s larger cities than in smaller, more rural jurisdictions.

Closing Gaps in the Estate and Gift Tax Base

Three transfer tax minimization mechanisms—zeroed-out grantor retained annuity trusts (GRATs), intentionally defective grantor trusts (IDGTs), and family-controlled entities with steep valuation discounts—significantly shrink the federal estate and gift tax base. This white paper explains how Congress can close all three loopholes. We estimate that these actions—along with complementary base-protecting and base-expanding proposals—would raise more than $65 billion over the fiscal year 2022 to fiscal year 2031 window (and possibly much more than $65 billion). They also would enhance the progressivity of the federal tax system and bolster the long-term revenue-raising capacity of the estate and gift taxes. To summarize key conclusions: — Congress should repeal section 2702(b)(1), the provision that enables high-net-worth individuals to achieve extraordinary transfer tax savings via GRATs; — Congress should harmonize the income tax and transfer tax treatment of IDGTs, preferably by treating these trusts as nongrantor trusts for income tax purposes; — Congress should limit lack-of-marketability discounts and eliminate lack-of-control discounts with respect to transfers of interests in family-controlled entities; and — Congress should supplement these three reforms with additional base-protecting and base-broadening measures: shifting to a tax-inclusive base for gift taxes; limiting the gift tax annual exclusion for transfers in trust; and expanding the requirement of consistency in value for transfer and income tax purposes. All of these steps remain relevant—and in some respects, even more urgent—if Congress enacts the Biden-Harris administration’s capital income tax reform proposal, which would limit the tax-free step-up in basis at death to the first $1 million of unrealized gains ($2 million per couple). Unless Congress secures the estate and gift tax base, high-net-worth taxpayers will respond to stepped-up basis reform by exploiting transfer-tax loopholes even more aggressively. For this reason, estate and gift tax loophole closers and stepped-up basis reform should be considered complements, not substitutes.

Fiscal innovation in nondemocratic regimes: Elites and the adoption of the prussian income taxes of the 1890s

The income tax is a central pillar of the modern fiscal state because of its revenue-raising capacity and administrative sophistication. Existing accounts point to interstate war and class conflict as key drivers of modern fiscal breakthroughs. In this article, we evaluate a third explanation for the origins of fiscal capacity that highlights the importance of intraelite competition for political and economic power in times of rapid industrialization. Modern forms of taxation generated a conflict between industry and agriculture over the distribution of the tax burden across sectors. The presence of electoral institutions that connected tax payments to voting rights created opportunities to overcome this sectoral divide and facilitated the formation of a political consensus for fiscal innovation. The political coalition supporting income tax adoption included higher-income industrial and agricultural elites who anticipated fiscal and electoral gains associated with the adoption of the new tax. Drawing on parliamentary debates in Prussia and additional district-level data, we document both the origins and electoral and economic consequences of the new income tax. We show that the adoption of a highly sophisticated income tax in 1891 shifted the tax burden from land to industry and diluted the political influence of the middle class. The findings clarify the coalitional dynamics leading to fiscal tax adoption in nondemocratic contexts.

An Appraisal of Revenue Structure of State Governments in Nigeria (1997- 2017)

The study appraised the revenue structure of State governments in Nigeria between 1997 and 2017. Annual secondary data from Central Bank of Nigeria (CBN) Statistical bulletin and Nigeria Bureau of Statistics (NBS) were used. The results of the study showed that the revenue share of the States from the Federation Account was 53%, which was above the average of the total revenue accruals to the States. This was followed by IGR with a distant 18% of the total revenue. The study concluded that this tier of government has low level of independent revenue-raising capacity to meet the ever increasing expenditure needs.

Does School Finance Reform Reduce the Race Gap in School Funding?

This paper offers new evidence on the impacts of school finance reforms (SFRs) precipitated by school finance litigation, exploring the extent to which the impact of SFR differs by district racial composition. Using difference-in-differences and event study models with a series of district and year (or state-by-year) fixed effects, and a sixteen-year panel of over 10,000 school districts, my analyses exploit variation in funding across school districts, and timing of school finance court orders across states, to estimate the effect of SFR on the distribution of district funding by racial composition. Models include relevant control variables available in national data and results are robust to numerous alternative specifications, including estimating impacts on percent changes in resources (in addition to levels), restricting analyses to districts in SFR states, controlling for additional covariates available in only some years and some states, and adding controls for state-specific time trends. In addition, I estimate changes in New York State to assess whether and to what extent results are sensitive to additional controls for revenue-raising capacity and district costs. Results suggest that SFR can work to alleviate racial funding gaps, though impacts are moderate.

How does intergovernmental fiscal environment affect general fund balances of major American cities?

ABSTRACTThis study explores the extent to which intergovernmental fiscal factors affect fiscal reserves in municipal general funds. Statistical results from panel data of 87 major cities in the US for the period from 1995 to 2010 show that cities facing more restrictive limitations on local property taxation tend to maintain higher levels of unreserved general fund balances. Additional analyses also show that fiscally constrained cities accumulate surpluses in their general funds. This is consistent with the proactive approach in which municipal governments make fiscal decisions with the awareness of expected state constraints on their revenue-raising capacity. We call for consideration of relevant intergovernmental constraints in the determination of appropriate level of fund balances for municipal governments.

Fiscal Soundness and Economic Growth: An Economic Program for Ontario

Ontario is on an unsustainable fiscal course. The government must act to bring the long-term cost of government in line with the revenue-raising capacity of the province. This Economic Program shows a number of policy directions in areas as diverse as healthcare, labour and education policy, tax reform, housing and municipal policy, as well as electricity and greenhouse gas policy, that can balance increases in spending with the generation of new revenues and cost-savings measures. This Economic Program adopts the fiscal presentations of the independent officers of the Ontario legislature – the Auditor General and Financial Accountability Office – as the authoritative sources for the short-, medium- and long-term fiscal outlook. The medium- and long-term fiscal outlook for Ontario is dire. This Economic Program recommends that the government restate the province’s books to reflect the Auditor General’s accounting treatment of pension assets and electricity-sector debt. Further, the government should adopt a sound long-term fiscal policy – which requires surpluses, not just balanced budgets – that meets the government’s debt-to-GDP target ratio of 27 percent. In healthcare, which already consumes roughly half of the province’s own-source revenues, policymakers will face continued cost pressure. This Economic Program views progress in addressing this issue – in addition to limiting public and private gaps in coverage for prescription drugs and mental health – as a critical challenge. This Economic Program also focuses on reforms to labour and employment legislation to increase the flexibility of existing minimum wage policies and employment and labour laws. It also focuses on improving the skills of Ontarians seeking mid-career improvements, and improving the performance of Ontario’s K-12 and post-secondary education systems. With recent United States tax reform considerably raising the attractiveness of the United States for new business investment, this Economic Program takes steps to improve the competitiveness of the province as a destination for firms to make investments and for workers to live. With regard to housing and municipal policy, this Economic Program seeks to lower the cost of housing across the province by taking steps to reduce barriers to construction and eliminating economically costly rent controls and transfer taxes. It would also fundamentally change the relationship between municipalities and the province by granting cities the ability to put their budgets on a sound financial footing and allow them more flexibility in financing infrastructure. Finally, no policy area has been more controversial than Ontario’s greenhouse gas and electricity policies. This Economic Program would preserve the best parts of the current government’s plan, while cutting ineffective policies and reducing costs to households. This Economic Program would seek long-term cost savings in the electricity sector, as opposed to short-term fixes that only add to the long-term cost of energy.

One Person's Drain Is another's Water Supply: Why Property Rights, Scope, Measurement and Hydrology Matter when it Comes to Integrated Water Resources Management

The expansion of Integrated Water Resource Management (IWRM) philosophies has given rise to some improvements in decision-making with greater attention being given to the relationship between upstream choices and downstream consequences. However, the limits of IWRM also need to be recognised, especially the demands on water planners seeking to balance multiple objectives across multiple sites. This paper scrutinises the need for superordinate integrated decisions when property rights are already well-defined and tradeable. By using simplified examples derived from the Australian milieu, we also consider cases where the property rights are less-well defined and trade is not an easy option. The examples demonstrate that efficient decisions can arise without a superordinate water utility making integrated plans but the scale of decisions does matter, as does the measurement of the attributes of water in question. The paper also shows the necessity for understanding and linking institutional scope, hydrological influences and ecological responses whenever IWRM is purportedly seeking to simultaneously bring about ecological gains. Vesting integrated decisions in water utilities on the basis of their revenue-raising capacity is also briefly scrutinised.

The Equity of Local Sales Tax Distributions in Urban, Suburban, Rural, and Tourism Rich Counties in North Carolina

The use of local options sales taxes (LOSTs) is creating largely unexplored equity concerns with regard to the revenue raising capabilities of different local governments. This article focuses on differences among urban, suburban, and rural counties; the impact of proximity to urban (or retail) centers; and the impact of LOST decisions on tourism rich counties, a new category of local governments. Using data from 2003 to 2009 on all 100 North Carolina counties and a spatial Durbin error panel model, I identify factors relating to LOST revenue raising capacity (RRC). The results indicate that tourism rich counties have the greatest LOST capacity, suburban counties have the least, and there is a penalty for bordering an urban county. However, statistically significant differences in the RRC of the four types of counties disappear once property taxes are included in the mix.

Tax Structure and Revenue-Raising Capacity in Spain: A Comparative Analysis with the EU

This paper describes the revenue-raising capacity and structure of the Spanish tax system, in comparison with the economies of the European Union. Spain stands out for the low weight of its tax revenues in GDP relative to the EU27 average. This lower weight of tax revenue is mainly a consequence of indirect taxes (VAT, excise duties and environmental taxes). In fact, Spain has the lowest weight of consumption taxation in the European Union. As regards labour taxation, revenue raised as a proportion of GDP is similar to the EU27 average, although the weight of social security contributions in GDP, in particular those charged to employers, is higher. Spain also raises relatively more revenue from the taxation of capital, in particular from the taxation of wealth.

Symposium on Fiscal Disparity and Equalization

This symposium provides scholars in public finance and management with a forum to showcase some new research on fiscal disparity and equalization. In the last decades, many countries and regions have established fiscal equalization programs to address the interregional or inter-local fiscal disparity, which is caused by differences in revenue-raising capacity and/or the costs of public service provisions. The articles in this symposium examine the extent of fiscal disparity and evaluate the effectiveness of various fiscal equalization programs in China and the U.S. In addition, they provide policy recommendations on how to improve the design of the equalization programs, which are potentially applicable to other countries and regions.

The Future of the Corporate Tax

This paper discusses three essential challenges of the present economic environment: serious long-term budget imbalances, dramatic increases in income inequality over recent decades, and a discrepancy between national or sub-national government jurisdictions and an increasing global economy. This trio of tough policy challenges necessitates a reevaluation of capital taxation in general, and the corporate tax in particular. Corporate taxation has an important role to play in both protecting the revenue-raising capacity of the income tax system and addressing income disparities. However, the global nature of economic activity requires modernization of corporate taxation; reform of U.S. corporate taxation is long overdue.

Estimating the Revenue-Raising Capacities of the States and Territories and the Implications for the Equitable Distribution of GST Revenue

The Commonwealth Grants Commission’s recommended allocation of some $45 billion of GST (VAT) revenue annually to the states and territories is heavily influenced by its estimate of their revenue-raising capacity, which it argues is primarily a function of the value of a jurisdiction’s tax bases. This paper argues that a jurisdiction’s revenue-raising capacity is primarily a function of the real household disposable income of residents after allowances for major cost-of-living differences, such as housing and journey-to-work costs, and tax exportation (the ability to tax non-resident income). Using this measure of revenue-raising capacity, we find that the CGC methodology significantly underestimates the real revenue capacity of the Australian Capital Territory (ACT) and Victoria and significantly overestimates the capacity of Queensland and Western Australia. The paper provides numerical estimates of the differences. The paper concludes that the principles on which the CGC determines the distribution of billions of dollars of funds are flawed and should be reformed.

The Fiscal Impact of Potential Local-Option Taxes in Massachusetts

Municipal governments in Massachusetts have experienced difficulties raising adequate revenues to meet their expenditure needs. Responding to these challenges, policymakers have been investigating additional revenue sources for municipalities, such as new local-option taxes. Using a Representative Tax System approach and new data, this paper examines the impact of local-option taxes on meals, general sales, income, and payroll on revenue-raising capacity of Massachusetts municipalities.This paper shows that new local-option taxes would help municipalities generate considerable additional revenues from untapped sources. However, revenue capacity from new local-option taxes is not evenly distributed across municipalities. Local-option tax capacity is concentrated in Boston suburbs and resort areas in eastern Massachusetts. On average, large cities would benefit more from local sales, meals, and payroll taxes than smaller towns. High-income, property-rich municipalities would gain more local-option tax capacity than low-income, property-poor municipalities. Local-option taxes also do not compensate municipalities in proportion to their loss of state aid dollars in FY 2009.Local-option taxes are likely to exacerbate fiscal disparities, because municipalities with low existing revenue-raising capacity often lack the tax bases for new local-option taxes. Policymakers could consider increasing equalizing state aid to offset these fiscal disparities. If more aid is not forthcoming, this paper proposes that the state change aid formulas to reflect differences across municipalities in local-option tax capacity, and to better target fiscally distressed communities. These strategies - explored in the Massachusetts context - could also be useful in other states.

Trends in the Fiscal Capacity of Ohio's Public Schools

The fiscal capacity of a school district measures the difference between a district's ability to raise revenues locally and the expenditures needed to provide some specified level of educational services. This article uses several different approaches to calculate fiscal capacity for school districts in Ohio from 1996 to 2006. The results show that when the measure of revenue-raising capacity is based on assessed value, there is a modest trend towards more equality across districts, but when the measure is based on income, there is a strong trend towards greater inequality. The results also show that adjusting the measure of fiscal capacity for state and federal subsidies substantially reduces the measured level of inequality. Districts from the Appalachian region of Ohio tend to have relatively low values for fiscal capacity, regardless of the approach used. The rankings of urban districts depend heavily on how economically disadvantaged students are weighted when estimating the needed level of expenditures.

Measuring Municipal Fiscal Condition: The Application of U.S.-Based Measures to the Context of Thailand

This research attempts to apply U.S.-based measures in order to examine municipal fiscal conditions in Thailand. Fourteen municipal governments located in the central and eastern regions of the country are explored, utilizing data from FY 2001 to 2006. The findings show that the selected measures of revenue-raising capacity and expenditure provide a sensible picture of Thai municipal fiscal conditions when compared to U.S. cities during past decades. Large, highly populous central cities as well as semi-rural, residential areas are fiscally weak. By contrast, suburban and industry-based cities are fiscally healthy. This study provides a foundation for the design of intergovernmental transfer systems that takes into account the local fiscal conditions and helps to extend the external validity of existing analytical tools.

Dilemmas of Solidarity: Rethinking Redistribution in the Canadian Federation

Dilemmas of Solidarity: Rethinking Redistribution in the Canadian Federation, Sujit Choudhury, Jean-François Gaudreault-Desbiens and Lorne Sossin, eds., Toronto: University of Toronto Press, 2006, pp. 218.Dilemmas of Solidarity: Rethinking Redistribution in the Canadian Federation, edited by Sujit Choudhury, Jean-François Gaudreault-Desbiens and Lorne Sossin, aims at broadening and deepening the Canadian debates about fiscal federalism and redistribution, which have often been framed in the narrow terms of “which order of government gets to raise/spend funds for what policies.” The 2002 report of the Séguin Commission (Quebec's Commission on Fiscal Imbalance, chaired by Yves Séguin) and, more specifically, its recommendation that steps be taken to address the vertical fiscal imbalance, or the “disjunction between revenue-raising capacity and expenditures involving different orders of government” (3) to ensure that provinces have the fiscal means commensurate with their policy jurisdictions is a case in point.

An Evaluation of the Stabilization Properties of Equalization in Canada

The Canadian system of equalization is designed to address differences in revenue-raising capacity across provinces, basing a province's annual entitlements on its actual tax bases. However, the standard against which a given province's equalization entitlements are calculated fluctuates from year to year with all provinces' tax bases and tax rates. The consequence is that, while the redistribution function is fulfilled annually, the stability of provincial revenues suffers. The evidence we present indicates that, at least for the three revenue categories we examine, the equalization system can actually be destabilizing, thereby imposing on provinces volatility in their potential revenue streams that exceeds what would exist in the absence of equalization.

An Evaluation of the Stabilization Properties of Equalization in Canada

The Canadian system of equalization is designed to address differences in revenue-raising capacity across provinces, basing a province's entitlements on its actual tax bases. However, since it does so on a year-on-year basis, the standard against which a given province's equalization entitlements are calculated fluctuates from year to year with all provinces' tax bases and tax rates. The consequence is that, while the redistribution function is fulfilled annually, the stability of provincial revenues suffers. The evidence we present indicates that, at least for the three revenue categories we examine, the equalization system can actually be destabilizing, thereby imposing on provinces variability in their potential revenue streams that exceeds what would exist in the absence of equalization.