University of Georgia, Baldwin Hall 204, Department of Public Administration and Policy, Athens, GA 30602, (706) 583-0553, email@example.com
Diversifying Municipal Government Revenue Structures: Fiscal Illusion or Instability?
Version of Record online: 3 MAR 2009
© 2009 Public Financial Publications, Inc.
Public Budgeting & Finance
Volume 29, Issue 1, pages 27–48, Spring 2009
How to Cite
CARROLL, D. A. (2009), Diversifying Municipal Government Revenue Structures: Fiscal Illusion or Instability?. Public Budgeting & Finance, 29: 27–48. doi: 10.1111/j.1540-5850.2009.00922.x
- Issue online: 3 MAR 2009
- Version of Record online: 3 MAR 2009
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.