Stabilizing State and Local Budgets: A Proposal for Tax-Base Insurance

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Released: June 2008 • Discussion Paper

Related Topics: Tax Policy, State & Local

Authors:

Akash Deep • Senior Lecturer in Public Policy, Harvard Kennedy School
Robert Z. Lawrence • Albert L. Williams Professor of International Trade and Investment, Harvard Kennedy School

Local governments that are constrained to balance their budgets have been forced to deal with short-term revenue shocks by cutting spending or increasing taxes. These actions exacerbate rather than alleviate the effects of the shocks, posing a risk of long-term problems. Federal government policies to help local governments deal with such problems have been unreliable and poorly targeted. This study proposes an affordable federal instrument that could mitigate the adverse impact of tax-revenue shocks on communities by allowing them to buy tax-base insurance. With annual premiums of less than 1 percent of their tax revenues, local communities could use insurance to mitigate revenue shocks by taking advantage of risk-sharing opportunities. The strength of a tax-base insurance program is that it would predetermine eligibility, causes, and the value of compensation. It would also be dependable because it would establish a property right that communities would have already paid for.