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A STATE AND LOCAL TAX PRIMER Most states are in fiscal hot water, regardless of their tax structures
Figure one shows the year-over-year quarterly changes in state revenues from major taxsources for all fifty states. Because this is a sum, it tends to smooth out inter-statevariations owing to differences in tax rates and bases, income recognition policies, andthe like. The figure also suggests that the portfolio effect from relying on a variety of taxtypes is pretty small.
State tax revenues are volatile; Oregon’s are more volatile than most.
Figure 2 shows year-over-year quarterly changes in total state revenues over the past tenyears. While the fluctuations are less dramatic than in Figure 1, the revenue trend isnevertheless characterized by a lot of volatility. These fluctuations are largely driven byunderlying changes in the real economy. Another way of putting it is that the systematiccomponent of state revenue growth is driven by changes in GDP. Variations in state product is one explanation for state-specific deviations from the systemic component of state revenue growth; differences in state tax structures and tax administration is another;the rest is random noise.Generally speaking the more progressive the overall tax structure the greater its volatility.States that rely heavily on a progressive personal income tax, for example, tend to have
 
more volatile revenue growth than states that rely on more regressive tax sources. That isthe bad news. The good news is that the elasticity of revenue with respect to income isapproximately ergodic. You tend to obtain about the same results over a moment in timethat you get over a period of time. What that means is that revenue structures that aremore volatile because they are more progressive, also tend to grow revenue faster over time, even without increases in tax rates or coverage.Figure 2:Oregon state relies heavily on progressive personal income taxes, as seen in Chart 1.Chart 1
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