Strength in diversity? Fiscal federalism among the fifty U.S. states

Abstract

Fiscal federalism in the United States has a distinctive structure that contrasts sharply with that in most other industrialized nations. Our purpose in this paper is to describe and explore the U.S. brand of fiscal federalism. We demonstrate that there is a striking amount of variety in the 50 state fiscal systems and that these differences have prevailed in the face of potentially disruptive forces. The variety we find stems in large part from states having meaningful fiscal autonomy, in particular, the authority to levy taxes. The result is likely higher societal welfare than would ensue without this autonomy.