No abstract

This paper examines (1) whether revenue diversification leads to greater instability as represented by revenue volatility, and (2) whether revenue complexity produces fiscal illusion as represented by increased public expenditures. These questions are answered by analyzing panel data on municipal governments between 1970 and 2002. The findings suggest that fiscal illusion does not occur among municipal governments, but revenue diversification does influence levels of volatility. However, the way in which municipalities diversify is important for achieving revenue stability. When diversification is considered in isolation, both tax and nontax diversification reduce revenue volatility. When diversification and complexity are considered simultaneously, the statistical effect of nontax diversification disappears. But, when a tax revenue structure is both diversified and complex, the likely outcome is greater revenue volatility rather than stability.

The financial condition of state and local governments has long been held as a prominent topic of discussion among government administrators, public economists, and political scholars. This article addresses the competing hypotheses of revenue diversification and revenue complexity and offers an empirical analysis of the various factors that affect state tax revenue diversification. The findings suggest that although political and demographic factors influence the level of state tax revenue diversification, economic factors and whether a state utilizes an income or sales tax to generate revenue represent the greatest determinants of state tax structures. As a result, this article serves as a foundation to initiate the development of a comprehensive theory of the determinants of state tax structures.

How diversified are small town revenues? Revenue diversification is analyzed among towns governed by town meetings. Using previously developed diversification measures, the findings confirm that these localities draw from less diverse revenue streams than other state and local governments. The reasons for these variations include differences in home rule status as well as tax and expenditure limitations imposed by states. The authors suggest that revenue allocation in these jurisdictions is substantively different from other forms of local government because these communities rely much less on sales taxation than states and municipalities. Their essay proposes possible options for improvement, along with other criteria by which small towns can assess their revenue diversification.

Do states engage in infrastructure expenditure competition to attract new economic activity? Economic theory is inconclusive on the matter. States might respond to increased infrastructure spending in competitor states by increasing their own infrastructure spending. Conversely, states may decrease spending in the presence of positive spillovers from competitor states' infrastructure investment. Using spatial econometric techniques and focusing specifically on highway spending, we demonstrate that states expend less on highways when spending in neighboring states increases. We explore this possibility further by modeling state personal income growth as a function of own-state and neighborstate highway spending. Our findings suggest positive spillovers influence interstate relationships for highway spending rather than race-to-the-top competition for economic activity.