Changing Demographics and State Fiscal Outlook: the Case of Sales Taxes

Abstract

Broad-scale demographic changes have implications for state and local finance in terms of the composition of the base of revenue sources and their yields. This article examines the effect of such changes on the potential future yield of consumption-based taxes. The effect of household characteristics and composition on the con sumption of selected groups of goods subject to ad valorem retail sales taxes is estimated, generating demographic elasticities of consumption. These elasticities are applied to projected demographic changes in eight states through the year 2000. The results show rather wide variation in expected consumption shifts and potential tax bases across the states, with income growth having the greatest effect, as expected. Excluding the effects of income and population change, the expected real growth in the consumption base is varied over states. It remains to be seen whether state and local tax structures can or will adjust to capitalize on their potential and whether this growth will be sufficient to offset expenditure pressures likely associated with these demographic shifts.