Are State and Local Revenue Systems Becoming Obsolete?

In recent months, we public finance types have become used to nearly universal reports of sharply declining state revenues. Although cyclical factors are mostly responsible, many tax analysts believe that long-term economic and technological developments are also partially to blame and will continue to constrain state and local revenue growth well into the foreseeable future. As a result of these developments, state and local revenue systems are becoming increasingly "out of sync" with the economy’s changing structure. The economic stocks and flows that they are designed to "meter" comprise a shrinking fraction of the nation’s wealth and economic activity. According to some, these factors are so pervasive and persistent that they threaten to make current state and local tax systems obsolete. This paper discusses the impact on state and local revenues of four such factors: 1) the shift in the nation’s mix of production and consumption from goods to services, 2) the growing importance of intangible assets in generating output, 3) the proliferation of electronic commerce; and 4) the intensification of interjurisdictional competition. While I provide evidence that all four factors threaten the revenue productivity of state and local taxes, I have no good solutions to offer. Numerous plans to modernize state and local revenues systems have been suggested, but most would sacrifice important tax policy goals. No solution presents state and local policymakers with a clear win-win situation, in which they could halt or reverse the decline in the revenue productivity of their taxes without sacrificing autonomy, competitiveness, neutrality, or administrative simplicity.