State Tax Structure and Multiple Policy Objectives

We use a portfolio model of state tax structure to examine how a state's economy and the nature of its taxes affect the choices available to state policymakers. Data from North Carolina and Massachusetts indicate that the income tax is the dominant tax in both states, that the two states differ in the nature of the trade-offs between characteristics such as growth and instability and between progressivity and instability, and that differences in the economies of the two states and their characteristics lead to differing prescriptions about the optimal mix of taxes. We conclude that policy recommendations about state tax structures may not be transferable across states.