State-Local Revenue Diversification, Stability, and Growth: Time Series Evidence

A common argument put forth in tax reform discussions is that a balanced revenue system is better equipped to handle downturns. The purpose of this paper is to consider the empirical relationship between a scalar measure of the diversity of a state’s state-local revenue system and the stability and growth of that revenue system. This evidence is drawn from panel data vector autoregression models. Impulse response analysis from these PVARs indicates that movements toward greater revenue system balance lead to greater revenue growth stability as well as faster rates of revenue growth itself.