Are State and Local Revenue Systems Becoming Obsolete?

Over the past two years, reports of declining or stagnant state revenues, spending cuts jeopardizing state and local programs, and compensating increases in local taxes have been widespread. Although cyclical factors and the bursting of the stock market bubble may be mostly responsible, many tax analysts believe that long-term economic and technological developments also are partly to blame and will continue to constrain state and local revenue growth well into the foreseeable future.

In simple terms, we are changing what and how we produce and consume. As a result, state and local revenue systems are becoming increasingly “out of sync” with the economy’s changing structure. The economic stocks and flows that these systems are designed to “meter” comprise a shrinking fraction of the nation’s wealth and economic activity. According to some, this mismatch is so pervasive and persistent that it threatens to make current state and local tax systems obsolete.

This paper discusses the impact on state and local revenues of four trends:

  • The shift in the nation’s mix of production and consumption from goods
    to services;
  • The growing importance of intangible assets in generating output;
  • The proliferation of electronic commerce; and
  • The intensification of interjurisdictional competition.