| Most state governments are legally required to have a balanced budget, in that budgeted revenues must equal budgeted expenditures. Furthermore, most states are not allowed to deficit spend. Thus, revenue must be sufficient to cover projected costs. State tax revenue is generally the largest source of revenue for which state budgets are funded. Therefore, in order to properly plan and execute a budget, states must have a reasonable expectation for future incoming tax revenue. In times of rapidly changing economic conditions, tax revenue generally becomes expansively volatile and more difficult to estimate. Consequently, a problem arises when actual tax revenue is realized at a level lower than the projected revenue, in that a budget deficit, which is prohibited in most states, occurs. Moreover, growth is also an important consideration when budgeting state tax revenue. Growth in state tax revenue must be sufficient to, at a minimum, cover inflationary expense, thus sustaining existing programs at current service levels. Using the state of Louisiana as the focus, the purpose of this study is to identify a state tax structure that is stable, yet allows for maximum growth. This will be achieved by applying Henry Markowitz’s optimal portfolio theory. This study examines times series data for Louisiana to evaluate tax revenue stability and growth as well as to construct an optimal tax revenue structure. Additionally, using cross sectional and time series data, this study establishes an average state or national model and assesses the average state model’s revenue stability and growth trends as well as its optimal tax structure. |
