State and Local Tax Policy Issues

his paper reviews recent economic events and their impact on U.S. fiscal performance and prospects. We highlight the historic nature of the 2009 budget outcomes, the unsustainability of plausible ten-year budget projections, and the increasingly dire long-term fiscal problem. These conditions leave federal policy makers with difficult choices. Over the next several years, as the recession ends and the economy recovers, policy makers will face a delicate balancing act between encouraging economic recovery and establishing fiscal sustainability. Even if a successful recovery ensues, however, medium-term and long-term fiscal problems have become increasingly urgent.

In 2009, the federal deficit will be larger as a share of the economy than at any time since the 1940s. After 2009, we project an average deficit of $1 trillion per year for the next 10 years, under optimistic assumptions. The longer-run picture is even bleaker, with a fiscal gap of 7-9 percent of GDP -- between $1 trillion and $1.3 trillion annually in current dollars. Recent trends in credit default swap markets suggest that although fiscal policy problems are usually described as medium- and long-term issues, these problems may be upon us much sooner than previously expected.

What will work best to stimulate the nation out of recession? Look to the states, says Len Burman in a commentary for public radio's Marketplace program.

Education is a key pathway out of poverty, yet schools that primarily serve minority students often fail to provide the educational opportunities available in predominantly white schools. A series of state court cases has addressed one cause of that disparity, the dramatic funding differences that result from reliance on local property taxes to fund schools. This paper examines the success of court-mandated solutions in equalizing spending per pupil across districts serving minority and white students. However, we show that there remains much disparity in other measures of educational quality and outcomes.

For the past 11 years, a growing number of states have held sales tax holidays, during which they exempt certain items from state - and often local - sales tax for a few days. Sixteen states and the District of Columbia have scheduled 25 tax holidays in 2008, most of which occurred in August. Holidays most frequently exempt clothing and school supplies, but some exempt computers, energy-efficient appliances, or hurricane preparedness items..