Adapting fiscal systems to a changing environment.(The Bookshelf)(State and Local Finances under Pressure)(Book Review)

Over the next 25 years, state and local governments will be forced to confront the fiscal impact of changing demographics, economic conditions, technology, and political attitudes. In the past, state and local governments restructured their fiscal systems in response to a single profound event, such as the Great Depression, which led many states to adopt a sales tax for the first time. Today, state and local governments face smaller, but more numerous pressures. While they might avoid taking action in the short run, they will eventually have no choice but to adapt to these circumstances and make substantial changes to their fiscal systems. According to David Sjoquist, editor of State and Local Finances under Pressure, "Without change, state and local fiscal systems will grow increasingly out of sync with economic reality. It will be death by a thousand pin pricks, not by a gun shot."

The 10 chapters in State and Local Finances under Pressure discuss a diverse array of subjects, with many predicting that state and local tax bases will shrink in the coming years. Sally Wallace, for example, argues that demographic and economic changes will force state and local governments to consider the costs and benefits of broadening their tax bases. The aging of the population, for example, will have serious implications for the personal income tax. As the population's income composition shifts from wages and salaries to retirement income and other transfer payments, the share of taxable income will decline. Wallace concludes that as a result, tax revenues will grow more slowly than the general economy.

Daniel Mullins examines the role of popular processes in the transformation of state and local finance. The property tax is one mechanism that has long been "the focus of tinkering and 'reform.'" He argues that a number of politically introduced constraints have been placed on the property tax, largely in response to public resistance to the notion of the property tax. For example, he finds that because of strong public resistance to the notion of the property tax, the relative role of property taxes in local general revenue has declined by 37 percent over the last 30 years. Nevertheless, Mullins says that the property tax will continue to play a significant role in local finance, because there is no viable replacement.

James Aim, Jill Ann Holman, and Rebecca Neumann project that increasing globalization will lead to a widespread decline in ...