Literature review

The fiscal conditions of the states have shown an improvement after the end of the Great Recession, but these recoveries are varied and incomplete.  Over 20 states continue collecting less revenue in form of tax than during the time of recession after inflation is has been considered and many of these states not yet built their financial cushions similar to the levels before the recession (Wall, 2016). The ratio of own source revenue of the state government that includes fess, charges and revenues shows that many of the states have recovered   , with this ratio exceeding one (Gordon ,2012).  Various factors can be considered to have influenced the recovery or failure to recover. The most factual reason why some states have not recovered is that the economies of these states have not fully recovered. The composition and policy of taxation for these states influences the growth of revenue since the taxes vary in terms of elasticity of the income, both individual and corporate. Those states that have been relying on the sales taxes to a great extent have had smaller recoveries on their revenues , while a share of tax on personal income on the aforementioned ratio seems to have  little correlation with recovery of revenue(Wall, 2016).  

It is a fact that tax policy can have a great on economic choices even though strategies such as tax rates cut can ultimately lead to economic growth thus more revenue in the long run (Carbaugh, 2015).   Policy makers in various states such as Maine, North Carolina and Alabama have been promoting big cuts in taxes for personal income so as to drive increased economic growth. Various academic studies have not supported the hypothesis that such cuts can attain positive effects can lead to a higher economic growth (Wall, 2016).  In fact, states have employed the cuts in income tax to attain income growth have not realized such growths.  Many of these studies that assessed the broad economic impact of personal income taxes at state levels did not find any noteworthy effects. However, tax policies that are designed well can bring about increased economic growth among the various states which in turn can lead to more revenues. The cuts on personal income tax cannot be said to have led to the growth or lack of growth for the state revenues since they are usually a zero sum game (Johnson et. al 2010). What this means is that, where states had to apply such cuts, they had to pay for them through a reduction of state services, increasing other taxes or combining both strategies. States that have experienced slow growth in revenue can attribute it to slow economy which eventually means that economic benefits are offset.  Taxes on both state and local authorities normally pay for services required by both the businesses and households (Johnson, Catherine & Singham, 2010). Such taxes are usually more in some areas as compared to others since public services that are of high quality are being financed and may have no impact on where businesses are going to be located. This implies that there was little impact of policy changes on personal income tax on the amount revenue collected by the state governments. Any increase in revenue that may have arisen from such policy changes appears to have been offset by the payments made through reduction of services provided by the businesses or various households (Johnson et. al 2010).

The effects of corporate tax changes on the economy of a state are hard to measure, given that the changes in tax policy may not be random and are themselves under the influence of the existing economic conditions. The states were able to raise higher sales tax revenue due to the changes in corporate taxes they introduced in the 2008-2009 period. Some of the states – around seventeen- increased their tax rates on sales to the extent that revenues increase by $8.2 billion. Some states resulted to reduction on their sales taxes which were mostly done inform of minor cuts which totaled less than $ 250 million each year.  Some of the states that had much increases were Indiana, Massachusetts and California. The tax increases were majorly temporary in some states but permanent in Massachusetts and Indiana (Wall, 2016).  This shows that some states were able to experience a recovery or increase in revenue fund informed by such changes.  The changes included an extension of tax bases on sales, may be by including the tax of products that had previously been subjected to excise tax only such as tobacco in Colorado, alcoholic drinks in Kentucky. Other states also included tax on internet digital downloads like movies (Wall, 2016).  Most such sales tax increments were aimed at various goods or services for manufacturing with the Louisiana enacting employing the largest such reductions.  A major concern   about the increases in sales tax is that they can be regressive. This is because families with low or moderate incomes pay a bigger share of their income as taxes than families with high incomes.  Many of the states that raised sales and business taxes have had to contend with large budget shortfalls given that such increases were just for a short while(Wall, 2016). The difference in revenue recovery over various states can be attributed to the various tax policy changes introduced by the states.  

Political factors relate closely with policy matters since actions that are adopted by a given state for the purpose of revenue recovery might have differed. The basis of such differences include political course taken by the state government and specifically the ruling political party. The problem is whether the direction taken by such governments in terms of policy can have impact on the recovery of revenue for the state or that of the local governments (Carbaugh, 2015). The tax policy of the state may be deemed relevant and a higher recovery on revenue may be experienced if the adopted changes on tax are discretionary. However, there is no significant evidence to show that a discretionary increase in tax had a tangible effect on the recovery ratio of the related states. An introduction of tax limitation, as stated above had insignificant impact on the recovery of revenue fund.  The demographic factors may also influence the amount of revenue fund or the revenue recovery of a given state (Chen, Weikart & Williams, 2014). These factors consist of demographic characteristics of a state’s population such as age, education and white. Age can relate to the percentage of people considered under the age of adulthood, education relates to the level attained, while trace relates to the distribution of opportunities among different colors. An analysis done previously to show the relationship between demographic factors indicates that there was a very insignificant correlation between the revenue recovery reports after the great depression and these factors (Wall, 2016).  However, unavailability of sufficient revenues can be affected by the general demographic patterns (Carbaugh, 2015). An increase in a number of individuals in the old age bracket can add a lot of pressure on services provided by the states’ governments like Medicaid and extended services and support while in the meantime, revenue collected is decreasing (Gordon, 2012). This is because such individuals in old age bracket will no longer be working.  

Economic growth is another factor whose impact can be felt on the amount of revenue collected, revenue recovery rate or the anticipated revenue fund collection. A small increase in the growth of state economy can lead to a noticeable increase in the revenue realized by the state or revenue recovery (Carbaugh, 2015).  The revenues of a state government are to a great extent at the mercy of the generally trends of the economy which can be beyond the immediate influence of these governments. This, however, does not imply that various discretionary changes on policy taken by the governments do not have an impact on the budgets. Changes on education reforms, strategies for economic reforms, limitations on tax and expenditure   and so forth can have   an effect on the revenue especially if such changes alter the states’ economic structure. Certain policy initiatives such as contingency funds can also have effects given that they are put in place to ensure mitigation of negative effects of fiscal imbalances (Gordon, 2012). It suffices to say that tax revenue has slowly but unevenly recovered after a reduction in all states during the 2007-2009 Great Recession influenced by the factors highlighted above.

References