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Impacts of Revenue Diversification and Revenue Elasticity on State Fiscal Health

Author: WENLI YAN AND DOUGLAS A. CARR
Published in PFM, Vol. 19 No. 2

Revenue diversification and elasticity of the revenue portfolio are important characteristics of a revenue structure. Using state financial data from 2007-2012, this study identifies the dif- ferent impacts of revenue diversification and revenue portfolio elasticity on the fiscal health of US states. Fiscal health is measured by a comprehensive set of indicators including measures of revenue, expenditure, operating position, and debt. We find that during an economic down- turn fiscal health is improved by revenue diversification but reduced by a more elastic revenue structure. Furthermore, the overall positive impact of revenue diversification outweighs the negative effect of revenue elasticity. Findings provide important guidance in designing a sound tax portfolio that generates adequate revenue while being able to withstand significant stress from business cycles.

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