Fiscal Capacity and Tax Effort of the American States: Trends and Issues

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Abstract

The author examines the historic context of state taxing power and fiscal capacity, and the current efforts of the U.S. Advisory Commission on Intergovernmental Relations to measure fiscal capacity and tax effort using a Representative Tax System (RTS). The two most commonly used methods of distributing federal aid to states are population and personal income, both incomplete measures of fiscal capacity. RTS estimates how much revenue each state and its localities would raise if it levied the national average tax rate for commonly used state and local taxes. The author considers the strengths and weakness of RTS as a measure of fiscal capacity and examines state rankings and trends since 1975.

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