Spending on Social Welfare Programs in Rich and Poor States. Final Report.. 2. Measuring Fiscal Capacity

07/01/2004

The term fiscal capacity can be measured several ways, although this term is generally used to represent a states potential to raise revenue and not the actual fiscal choices made. Common ways for measuring fiscal capacity include the following:

  • Per capita personal income (PCPI). This measure represents the total personal income of the states residents (e.g., wages and salaries, interest income, social security benefits, SSI, AFDC/TANF cash assistance and pensions, but not Food Stamps, housing vouchers, and EITC) divided by the states total population. PCPI is widely used to measure fiscal capacity because data are readily available and because it is a relatively good indicator of residents ability to pay taxes, which, in turn, can fund services. It is also used in determining the federal match for Medicaid reimbursement. One shortcoming of this approach is that it ignores the extent to which states can impose tax burdens on nonresidents.5 PCPI data are available from the Bureau of Economic Analysis for 1929 through 2001.
  • Representative tax system (RTS). To measure state tax capacity, the Advisory Commission on Intergovernmental Relations (ACIR) applies the average tax rate on income, consumption, and real property over all states to each states tax bases. The ACIR produced the RTS between 1962 and 1991.
  • Total taxable resources (TTR). This measure, which has been calculated by the U.S. Department of Treasury since 1992, captures a states ability to raise revenues. It is equal to the states Gross State Product increased by residents income earned out of state, federal transfers, and accrued capital gains less federal taxes paid and depreciation.

Of the three measures, only the PCPI data are available from FYs 1977 through 2000, the period examined for this study. Generally, states that rank low on one measure also rank low on the other measures. However, some states are ranked differently. For example, Alaska is ranked the 17th highest state using the PCPI, the 3rd highest using the RTS, and the 5th highest using the TTR. These differences can be explained, for the most part, by the fact that a large portion of the income produced in Alaska is earned from oil and natural gas production (Compson & Navratil, 1997) by individuals residing outside Alaska.

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