The interactive effect of revenue diversification and economic base on US local government revenue stability

Abstract

Over the past 50 years, revenue diversification has emerged as an important trend in US local and state government finance. As a result, the role of the property tax has declined relative to other revenues, such as income taxes, sales taxes and user charges. This article examines the impact of revenue diversification on the revenue stability of local governments and whether the impact varies according to the nature of a jurisdiction's economic base. The findings are highly relevant to autonomous national governments in the EU. In addition, revenue stability is a significant factor that rating agencies take into account when determining a government's capacity to pay off debt, so the article has particular relevance to countries with large debts.

Notes

*Volatile revenue streams can cause disruption in service delivery and other long-term inefficiencies. Balanced budget requirements and constrained debt capacity make revenue stability an important policy objective for many sub national governments. Furthermore, most government expenditures that are devoted to personnel or public services are either non-cyclical or counter-cyclical. Increased revenue volatility makes government more vulnerable to economic downturns and fiscal crises. In addition, the revenue risk transmitted through volatile revenue streams adds to the additional costs of acquiring capital.

* Economic instability of a jurisdiction and instability of an economic base are used interchangeably in this article; both refer to the regional income and employment fluctuations caused by the external risk.

* In this analysis, all financial data have been converted to 2000 constant dollars using the implicit price deflator for gross domestic product provided by the Bureau of Economic Analysis.