DIFFERENCES IN FISCAL CAPACITY AND EFFORT: THEIR SIGNIFICANCE FOR A FEDERAL REVENUE-SHARING SYSTEM

Under pending proposals for Federal revenue sharing, the region of state-local taxes or "all general revenue" to personal income in the respective states would be used as the basis for adjusting then allocations for relative fiscal effort. This seems to presume either that personal income data closely indicate the states' relative financing capability or that no better measures are possible. Both presumptions can be questioned. A recent study estimates each state's revenue capacity in terms of the prevailing state-local revenue system, and supplies related measures of its revenue effort. For numerous states, these effort findings differ materially from those resting on personal income data. Regular annual preparation of explicit revenue capacity figures (feasible at modest cost and effort) would permit sounder effort adjustments in revenue sharing and better interstate fiscal comparisons than are now possible.