State fiscal governance requires both raising revenue and spending on government services. The literature on fiscal equalization and horizontal equity has established that measures of fiscal capacity, or the revenue-raising ability of a sub-national government (SNG), should be complemented by measures of fiscal need: the ability of a SNG to provide services given an average level of revenue. The Representative Tax System is an established method for measuring fiscal capacity, but the measurement of fiscal need has received less attention. In this paper, we seek to provide the first regression-based estimates of state-level fiscal need in the United States.
Data/Methods
This paper introduces a novel, data-intensive extension of the Representative Expenditure System that estimates fiscal need in the United States using regression methods rather than the current workload-based approach. We use data from the 50 states and the District of Columbia, including actual expenditure by spending category as well as a large set of potential determinants of both capacity and need to estimate the level of spending required for each state to provide a national average level of public services. As this paper is exploring new methods, we consider three regression approaches: the most data-intensive, the least data-intensive, and an intermediate method to determine the robustness of the estimates to methodological changes.
Results
The regression-based results indicate that the prior workload-based approach tends to provide estimates of expenditure levels at odds with both theory and actual state expenditure behavior. Among the regression-based approaches, even the least data-intensive approach appears to offer improvements on existing methods. Potential avenues for future development of fiscal need and fiscal comfort estimation are also discussed.