Fiscal Federalism and Tax Effort in the American States

Abstract

In the 25 years following the Second World War, state governments doubled the amount of inflation adjusted revenue that they collected in taxes. That represented a growth rate more than double that of the federal government (see Maxwell 1972). On average, the increase in state tax effort flattened out markedly by the 1980s, but there has been tremendous variation in the degree to which individual states have raised or lowered the tax burden on citizens over the last four decades. This study argues that federalism, and particularly the grant-in-aid system, influenced state budgetary decision-making and ultimately tax levels within recipient jurisdictions over the past 40 years.