State Revenue Cyclicality

How are major state revenue sources affected by the business cycle? Could changing the mix of taxes mitigate the severity of cyclical budget problems? This paper examines issues in estimating and interpreting the short-run elasticity of taxes with respect to personal income. Recent literature implies that, on average, state personal income taxes and sales taxes have very similar short-run elasticities, suggesting that changing the tax mix would have little overall impact on revenue variability. However, cross-state variations around those averages are considerable and specification matters, suggesting that there are no easy or general answers to the framing questions.