Are State Governments Prepared for Fiscal Crises? A Look at Revenue Diversification during the 1990s

Abstract

The financial condition of state and local governments has long been held as a prominent topic of discussion among government administrators, public economists, and political scholars. This article addresses the competing hypotheses of revenue diversification and revenue complexity and offers an empirical analysis of the various factors that affect state tax revenue diversification. The findings suggest that although political and demographic factors influence the level of state tax revenue diversification, economic factors and whether a state utilizes an income or sales tax to generate revenue represent the greatest determinants of state tax structures. As a result, this article serves as a foundation to initiate the development of a comprehensive theory of the determinants of state tax structures.