State governments are an important part of the United States' fiscal system. States exhibit considerable diversity in the structure of both their tax and spending systems. The lessons learned in the "laboratory" of the states are a good model for the design and execution of fiscal policy at the federal level. States are also important in their own right. In 1986, states spent $1,424 per capita or 31.7% of the federal level. States levied per capita taxes totalling $1,039, or 33.2% of the federal government per capita tax burden of $3,131. States have an important role in intertemporal fiscal policy as well. In 1986, states had accumulated per capita debt outstanding of $984 and individually states display considerable diversity in the use of "rainy day funds" to substitute spending and revenues across the business cycle. The contribution of this project is to construct detailed data on the allocation of private capital by state and to combine this new data with existing data to form a longitudinal data set covering both private sector and public sector capital stocks, investment, employment, and output. Using these data, the investigator will undertake empirical analyses of the beneficial production externalities generated by state and local government capital stocks, of the incentive effects of corporation taxation on the accumulation of private capital, of the effects on wage taxation on equilibrium employment, and on the role of sales taxes in the determination of output. This project assembles a valuable new data set for the study of state fiscal policy. The results of the empirical studies will provide a useful guide to the efficiency and equity of different tax policies at both the state and federal level. For example, states have a long experience with the design and administration of sales taxes. The results of this research could provide new information on the economic consequences of a national value added tax (VAT).
