| Stability of tax revenue during economic downturns is an important feature of state tax systems. With almost all states subject at least to some degree to balanced budget requirements, the greater the decline in revenue during recessions, the greater the pressure to cut services or raise taxes. While some expenditure needs are stable throughout the business cycle, income maintenance, health care, unemployment insurance, and other services for the needy tend to be countercyclical, with need rising during recessions. The more stable are revenues, the less is the need for adjustments that may worsen the effects of economic downturns. The major sources of state tax revenue are personal income taxes and taxes on consumption, including general sales and gross receipts taxes and excise taxes on tobacco, alcohol, and gasoline. Among the forty-eight contiguous states in 2007, the median share of tax revenue contributed by the personal income tax was 35 percent, while the median share from consumption taxes was 45 percent. With little support in the literature, the conventional wisdom says that consumption taxes are more stable than taxes on income because the consumption tax base is less elastic than the income tax base with respect to changes in aggregate income (Tax Foundation 2013). The Great Recession provides an important test case for investigating the role of state tax structure in revenue sensitivity. The recession precipitated the sharpest decline in state tax revenues in the postwar period. From peak to trough (Q4 2008 to Q2 2010), real per capita income tax receipts fell by 19.4 percent, and sales tax receipts fell by 17.6 percent (Q4 2008 to Q3 2010). State tax revenues did not regain their prior nominal peak until 2011, and real receipts did not reach their prior peak until the fourth quarter of 2013.1 However, amid the depth of the aggregate decline, there was considerable variation across states. Of the forty-eight contiguous states, thirtysix had nominal declines in state tax revenue between 2007 and 2009, while twelve had increases. While part of this variation was undoubtedly due to regional differences in the severity of the recession, another part may have been due to differences across states in tax structure. The goal of this article is to quantify the role of these two factors. |