Research Paper No. 9702

An Improved Method for Estimating

The Total Taxable Resources

Of the States

by 

Michael Compson* 

John Navratil** 

*Office of Economic Policy, U.S. Department of the Treasury, Washington DC. ** Staff, Joint 

Committee on Taxation, U.S. Congress, Washington DC. The authors would like to thank John 

Kitchen and Mike Springer at Treasury for comments on earlier drafts of this paper and Dick 

Beemiller and Wallace Bailey from the Bureau of Economic Analysis for their assistance in 

providing the data used in this analysis. The work for this paper was initiated while both authors 

were employed at the Treasury Department. All views expressed are those of the authors and do 

not necessarily represent the policies or views of the Department of the Treasury or the Joint 

Committee on Taxation. 
ABSTRACT 

Under current law, the Department of the Treasury is responsible for calculating estimates 

of States' "total taxable resources" (TTR). TTR is one of several potential measures of States' 

fiscal capacities, i.e., their ability to raise revenues from their own sources. These estimates of the 

State's TTR's are currently used in formulas that allocate funds among the states for the 

Community Mental Health Services and Substance Abuse Prevention and Treatment block grants. 

The potential for more widespread use of this measure in other grant programs suggests that a 

review of the current methodology is appropriate. This paper presents an analysis of the Treasury 

Department's current methodology to estimate States' total taxable resources, and proposes an 

alternative methodology that more accurately reflects the underlying theory of the original 

conceptual framework of TTR. 

JEL Classifications: H70, H71, H77 
INTRODUCTION 

Under current law, the Department of the Treasury is responsible for estimating total 

taxable resources (TTR) for each of the states. TTR is one of several potential measures of a 

state’s fiscal capacity - its ability to raise revenue from its own sources - and is an outgrowth of a 

1985 Treasury study on the fiscal relations between the Federal, State, and local governments. 

Measures of fiscal capacity are incorporated in formulas that allocate funds among the 

states for a variety of Federal grant and block grant programs. Per capita personal income is the 

most frequently used measure of fiscal capacity, and is used in the largest grant program to the 

states, Medicaid ($95 billion in FY 1997). The arguably better, though less frequently relied on 

measure of fiscal capacity -- TTR -- is used in the formulas that allocate Federal grants among the 

states for the Community Mental Health Services and Substance Abuse Prevention and Treatment 

block grants. The amount of funds allocated using TTR has increased from $805 million in FY 

1989 to $1.6 billion in FY 1997. 

The level of funding that TTR affects has increased and could increase dramatically further 

if TTR were incorporated into other Federal grant programs as has been proposed in the recent 

past (i.e., the Medicaid block grant proposal). Moreover, TTR has been more widely used over 

the years. For example, several GAO studies and a recent Department of Transportation study on 

the level of state effort on highway spending have used TTR as a base to measure states efforts in 

the provision of public goods. In addition, several GAO studies have recommended that TTR be 

incorporated into a new Medicaid formula to measure the fiscal capacity of the states. 

Like any statistical measure, TTR should be reviewed periodically to ensure it generates 

the best possible estimates. A review of the current methodology for estimating TTR at this time 

is especially important given the increased use of TTR and the potential for significant increases in 

the amount of funds allocated using TTR. Our review reveals several shortcomings in the current 

method for estimating TTR. As a result, we propose an alternative method for estimating TTR 

that better accounts for cross-border income flows and more closely reflects the original 

conceptual framework for TTR. 

MEASURING FISCAL CAPACITY 

Fiscal capacity is defined as a state's potential ability to raise revenue from its own 

sources.1 There are a variety of measures used to estimate a state’s fiscal capacity, each with its 

own limitations. There are two general categories for the various measures of fiscal capacity: 

indices of the relative economic resources or income in a state, and, indices of the relative 

1

 Some have used the term fiscal capacity to refer to a state’s ability to raise revenue relative to its cost of 

providing services. A state’s relative need for services and the costs associated with those services is beyond the 

scope of this analysis. 
revenues that can be raised under a standard fiscal policy2

. 

A relative income index is an accounting exercise that measures the relative aggregate 

income within a state, however income is measured. There are three different measures of state 

income that can be used as relative income indices: State Personal Income (SPI) which accounts 

for all of the income flows received by the residents of a given state, Gross State Product (GSP) 

which accounts for all of the income produced within a state, and TTR, which is defined as the 

unduplicated sum of the income flows produced within a state and the income flows received by 

its residents that a state can potentially tax. 

Within the relative income framework, all income flows are given equal weight, precluding 

any attempt to discriminate among them on the basis of their taxability or the actual fiscal choices 

made by the states. The primary argument is that the aggregate income flows (however 

measured) and the political constraints within a state ultimately determine the actual fiscal choices 

made by states. 

Unlike the relative income indices, the relative revenue indices attempt to measure the 

“taxability” of the various income flows within a state. As such, revenue indices attempt to 

analyze the composition of resources within a state as well as the total levels of resources. 

Revenue indices apply different tax rates to the various economic bases of a state to generate an 

estimate of a state’s potential tax revenues. Fiscal capacity is measured by the state’s potential 

tax revenues, relative to the potential of the other states. This is quite distinct from the income 

indices, which say nothing about potential tax revenues. Revenue indices include: the 

Representative Tax System (RTS) and the Representative Revenue System (RRS)3

. 

TTR was designed to overcome the problems associated with using SPI and GSP as a 

measure of fiscal capacity, since neither is a comprehensive measure of the income flows that a 

state can potentially tax. Given this, an overview of these two measures and their shortcomings is 

essential to understanding the concept of TTR. 

State Personal Income and Gross State Product 

State Personal Income (SPI) is currently used in the Federal Medical Assistance 

Percentage4 (FMAP) formula to determine the Federal matching rate for Medicaid and several 

2

Much of the discussion is drawn from the 1985 Treasury study: Federal-State-Local Fiscal Relations: Report 

to the President and Congress, that was commissioned by Congress to examine the key issues of Federal-StateLocal fiscal relations. 

3

See Measuring State Fiscal Capacity, 1987. 

4

 This formula uses per capita income to measure both a state's need to provide services and its fiscal capacity. 

GAO studies have concluded that per capita income is not a good proxy for measuring either a state's needs or its 

fiscal capacity. This analysis is only concerned with the shortcomings of SPI to measure a state’s fiscal capacity. 

2 
other programs. It is widely recognized that SPI is an incomplete measure of a state's fiscal 

capacity because it does not include, and by definition is not intended to include, all of the 

potentially taxable income flows produced in a state. For example, many corporations retain a 

portion of their profits for investment purposes. These retained profits are not part of personal 

income by definition, but may be subject to tax through corporate income taxes. Also, business 

income received by out-of-state residents (dividends for example) are not reflected in SPI at the 

location of the business, but may be subject to taxation through state business taxes. In addition, 

commuter income - income earned in one state by residents of another state - may be subject to 

taxation in the state where it is earned but is not included in that state’s measure of personal 

income. Given these potentially large income flows that are not accounted for, SPI could 

significantly understate the fiscal capacity of some states. 

The essential shortcoming of SPI is that it is not a comprehensive measure of the income 

flows that a state can potentially tax. The lack of completeness is illustrated by comparing the 

income received by Alaska’s residents (SPI) and the income produced within Alaska (GSP). The 

ratio of SPI to GSP for Alaska in 1994 was 62 percent, indicating that a large portion of the 

income produced in Alaska is earned by individuals who do not reside in Alaska. The ratio 

reveals that SPI does not fully account for all of the oil and natural gas produced within Alaska, 

omitting significant flows of potentially taxable income. 

Gross State Product (GSP) has also been suggested as a measure of fiscal capacity. It, 

however, suffers from the same basic handicap as SPI in that it is not comprehensive. GSP, by 

definition, does not include income earned by residents from out-of-state sources. Specifically, 

resident earnings (wages, salaries, proprietor’s income, etc.) from out-of-state, and resident 

dividend and interest income earned from out-of-state sources, by definition, are not included in 

GSP. According to unpublished BEA estimates, the commuter income inflows of 10 states 

(including the District of Columbia) were more than 4 percent of GSP in 1994. Not accounting 

for these inflows would significantly understate the fiscal capacity of these states. TTR was 

designed to overcome the lack of completeness associated with SPI and GSP by accounting for 

the cross-border income flows. 

Total Taxable Resources (TTR) 

It should be noted at the outset that the name total taxable resources is somewhat of a 

misnomer since it implies that the measure includes all of the taxable resources within a state. 

This is not true since TTR does not capture wealth, i.e., property and real estate. Instead, TTR is 

defined as the unduplicated sum of the income flows produced within a state and the income 

flows received by its residents which a state can potentially tax. The distinction between flows 

which a state can potentially tax and the actual fiscal choices made by states is critical. TTR says 

nothing about, nor does it consider, the actual fiscal choices made by the states. In sum, TTR is a 

flow concept, a comprehensive measure of all the income flows a state can potentially tax. 

The development of TTR was a direct response to Congressional concerns about the 

3
inadequacy of SPI as a measure that accurately reflects the relative ability of state and local 

governments to raise revenues to provide public services. TTR was designed as a comprehensive 

measure of all the sources of income that a state could conceivably tax, without regard to states’ 

actual tax policies. The initial definers of TTR recognized, for the reasons discussed previously, 

that neither SPl nor GSP, considered separately, is a comprehensive measure of a state's potential 

taxable resources. Their solution was to address the deficiencies of each of these measures by 

capturing the cross-border income flows that are not accounted for in GSP. 

The experimental estimates by Carnevale (1986) attempted to reflect the conceptual 

framework laid out by Sawicky (1986) as closely as possible. The methodology for estimating 

TTR set forth in the 1985 Treasury study had the following basic framework: it started with GSP 

as the base, subtracted certain components of GSP that were deemed not to be subject to State 

taxation, such as employer contributions for social insurance, and then added the components of 

SPI that were not already captured in GSP, namely the various components of income derived 

from out-of-state sources. 

Figure 1 illustrates the underlying methodology for the experimental estimates of TTR and 

the proposed methodology. Scenario 1 depicts two states with closed economies; i.e., there are 

no cross-border income flows. Under this scenario, TTR would equal GSP less the amount 

deemed not to be subject to State taxation. In this case, TTR would be less than GSP for both 

states and total TTR would be less than total GSP. Scenario two assumes that some of the 

income produced in state B is earned by residents in state A. Under this scenario, TTR for state 

A would equal GSP less the amount of income deemed not to be subject to State taxation, plus 

the income flows earned by its residents in state B. Including the cross-border income flows 

causes state A’s estimate for TTR to be greater than GSP. While the estimate for state B remains 

the same, accounting for the cross-border flows causes aggregate TTR to be greater than 

aggregate GSP. 

The possibility that TTR for a given state may be greater than its GSP and that aggregate 

TTR could be greater than aggregate GSP may generate some confusion. How can a state tax 

more than what is produced within its borders? And, how can the sum of the fiscal capacity of 

the states be greater than what is produced in the country? 

Given that GSP does not account for all of the income flows that a state can potentially 

tax, the fact that TTR might exceed GSP for a given state is not a problem in-and-of-itself. The 

simple answer to the questions above is that states have the ability to tax income flows earned by 

its residents from sources outside of its borders and these flows are not accounted for in GSP. 

The key issue is whether states can tax those income flows, not whether they actually do so, 

which is irrelevant within the TTR framework. It is important to remember that we are not 

4
Figure 1 -- General Framework for Estimating TTR Under the Experimental 

and the Proposed Methodologies 

Scenario 1 -- Incom e P roduced Equals Income Received 

No C ross-Border Income Flows 

STATE A 

GSP=$50 

STATE B 

GSP=$200 

$50 GSP $200 

$5 Le s s: c o mpone n ts not taxabl e by state s $20 

Inco me Flows No t Accoun ted for 

$0 Plus: in GSP $0 

$45 Equals: TTR $180 

Sum of GSP = $250

Sum of TTR = $220

Sum of GSP > Sum of TTR

Scenario 2 -- Incom e P roduced Does No t Equal Income Rece ived 

Cross-Border Income Flows From S tate B to S tate A -- Dividend ($25) & In te re st ($10) 

STATE A 

GSP=$50 

STATE A 

GSP=$200 

$50 GSP $200 

$5 L e ss : co mpon en ts not taxabl e by s tate s $20 

Inco me Fl ows No t Accoun ted for 

$35 Plus: in GSP $0 

$80 Equals: TTR $180 

Sum of GSP = $250

Sum of TTR = $260

Sum of GSP < Sum of TTR

5
attempting to measure the output of a given state. Rather, we are measuring the relative fiscal 

capacity of the states, which by definition includes all potentially taxable income flows. 

Accounting for these potentially taxable cross-border income flows is the keystone of TTR since 

it addresses the lack of completeness associated with SPI and GSP. 

Although this general framework for estimating TTR is straightforward, there is not 

universal agreement on the precise items to subtract from, or add to, GSP. The proposed 

methodology, discussed later in this report, adopts the same basic framework with some 

modifications. 

TTR required an operational definition as a result of legislation requiring the Secretary of 

Treasury to generate estimates of TTR for use in the allocation of the Drug, Alcohol Abuse and 

Mental Health Services block grant in FY 1989. The method devised to estimate TTR was an 

attempt to capture the essential principle underlying the definition of TTR put forth in the 1985 

Treasury study--to account for all income flows that a state could legally tax without any double 

counting. As discussed below, the method devised then, and which is currently in use, does not 

fully accord with this principle. 

CURRENT TTR METHODOLOGY 

The present Treasury methodology for calculating each state's TTR is to allocate national 

GSP according to the state's average share of national Personal Income and aggregate GSP: 

TTRs = 0.5(PIs/PIn +GSPs/GSPn) GSPn 

where 

TTRs = state total taxable resources for a given state

PIs = state personal income

PIn = U.S. personal income

GSPs = gross state product

GSPn = aggregate gross state product (actually use GDP)

The heart of the current methodology is the averaging of a state's share of SPI and its GSP 

share and allocating aggregate GSP according to those shares. The averaging is intended to 

account for the phenomenon of cross-border income flows which render SPI and GSP incomplete 

measures of fiscal capacity. Table 1 presents Treasury's most recent national and state estimates 

for TTR, per-capita TTR, and an index of relative per-capita TTR. An index number above 100 

indicates that a state's capacity to raise revenues is greater than the national average. A number 

below 100 indicates that a state's capacity to raise revenues is less than the national average. 

6
Table 1 -- Most Recent Estimates of Total Taxable Resources (TTR) 

Total $ Billions Per Capita $ Per Capita Index 

1994 1995 1996 1994 1995 1996 1994 1995 1996 

Alabama 91.6 95.7 100.2 21,725 22,535 23,450 81.4% 81.5% 81.5% 

Alaska 20.0 20.7 21.4 33,324 34,343 35,282 124.9% 124.3% 122.6% 

Arizona 95.9 101.8 108.3 23,478 23,647 24,456 88.0% 85.6% 85.0% 

Arkansas 51.0 53.5 56.3 20,780 21,545 22,426 77.9% 78.0% 77.9% 

California 879.3 917.8 965.2 28,036 29,076 30,277 105.1% 105.2% 105.2% 

Colorado 101.6 107.3 113.6 27,741 28,640 29,722 104.0% 103.6% 103.3% 

Connect icu t 116.1 121.3 127.0 35,470 37,087 38,801 132.9% 134.2% 134.8% 

De laware 24.1 25.3 26.8 34,052 35,269 36,907 127.6% 127.6% 128.2% 

D istrict of Columbia* 35.1 36.2 37.7 61,808 65,262 69,493 231.6% 236.1% 241.4% 

Florida 346.0 363.1 383.1 24,773 25,597 26,602 92.8% 92.6% 92.4% 

Georg ia 180.9 190.7 201.8 25,611 26,456 27,442 96.0% 95.7% 95.3% 

Hawaii 35.8 37.0 38.2 30,514 31,401 32,294 114.4% 113.6% 112.2% 

Idaho 24.8 26.1 27.4 21,787 22,374 23,047 81.7% 81.0% 80.1% 

Illinois 340.2 355.5 373.3 28,988 30,148 31,513 108.6% 109.1% 109.5% 

Ind iana 142.2 147.9 155.0 24,730 25,513 26,532 92.7% 92.3% 92.2% 

Iowa 68.9 71.3 75.6 24,313 25,078 26,520 91.1% 90.7% 92.1% 

Kansas 63.3 66.1 69.6 24,829 25,781 27,060 93.1% 93.3% 94.0% 

Kentucky 85.3 89.0 93.6 22,283 23,079 24,102 83.5% 83.5% 83.7% 

Louisiana 98.4 102.4 106.9 22,819 23,607 24,566 85.5% 85.4% 85.3% 

Ma ine 27.6 28.6 30.0 22,295 23,116 24,091 83.6% 83.6% 83.7% 

Maryland 143.8 149.7 156.6 28,768 29,708 30,887 107.8% 107.5% 107.3% 

Massachusetts 191.0 200.8 210.9 31,612 33,068 34,624 118.5% 119.7% 120.3% 

Michigan 251.6 263.6 275.3 26,526 27,638 28,692 99.4% 100.0% 99.7% 

Minnesota 126.3 132.0 140.0 27,629 28,594 30,067 103.5% 103.5% 104.5% 

Mississippi 51.3 53.6 56.4 19,217 19,881 20,758 72.0% 71.9% 72.1% 

Missouri 131.1 137.2 144.3 24,849 25,800 26,929 93.1% 93.4% 93.6% 

Montana 17.7 18.5 19.4 20,633 21,283 22,031 77.3% 77.0% 76.5% 

Nebraska 41.0 42.7 45.4 25,220 26,065 27,485 94.5% 94.3% 95.5% 

Nevada 43.0 45.8 49.1 29,345 29,881 30,641 110.0% 108.1% 106.4% 

New Hampsh ire 31.5 33.1 34.6 27,742 28,815 29,804 104.0% 104.3% 103.5% 

New Jersey 265.3 277.0 289.9 33,557 34,841 36,289 125.8% 126.1% 126.1% 

New Mex ico 36.4 38.3 40.1 21,925 22,678 23,411 82.2% 82.1% 81.3% 

New York 578.4 602.8 631.6 31,783 33,139 34,732 119.1% 119.9% 120.7% 

North Caro lina 177.3 186.8 197.2 25,048 25,934 26,928 93.9% 93.8% 93.6% 

North Dakota 13.9 14.2 15.3 21,684 22,125 23,760 81.3% 80.1% 82.5% 

Oh io 282.3 294.6 307.9 25,439 26,463 27,561 95.3% 95.8% 95.7% 

Ok lahoma 68.9 71.5 75.0 21,187 21,827 22,715 79.4% 79.0% 78.9% 

Oregon 76.1 80.2 85.1 24,588 25,483 26,560 92.1% 92.2% 92.3% 

Pennsylvan ia 312.6 325.1 340.6 25,924 26,958 28,255 97.2% 97.5% 98.2% 

Rhode Island 25.5 26.6 27.7 25,638 26,839 27,940 96.1% 97.1% 97.1% 

Sou th Carolina 80.3 84.0 88.2 22,068 22,914 23,840 82.7% 82.9% 82.8% 

Sou th Dako ta 16.9 17.4 18.7 23,402 23,909 25,466 87.7% 86.5% 88.5% 

Tennessee 126.8 133.3 139.5 24,543 25,414 26,219 92.0% 92.0% 91.1% 

Texas 469.0 492.1 519.1 25,441 26,174 27,138 95.3% 94.7% 94.3% 

U tah 41.1 43.5 46.4 21,488 22,235 23,176 80.5% 80.5% 80.5% 

Vermon t 13.8 14.5 15.2 23,833 24,818 25,842 89.3% 89.8% 89.8% 

Virginia 181.4 189.2 198.4 27,699 28,604 29,724 103.8% 103.5% 103.3% 

Washington 146.3 153.6 162.5 27,349 28,196 29,363 102.5% 102.0% 102.0% 

Wes t Virginia 36.2 37.4 38.9 19,888 20,466 21,301 74.5% 74.1% 74.0% 

W isconsin 128.5 134.4 140.9 25,271 26,248 27,306 94.7% 95.0% 94.9% 

Wyoming 13.7 14.3 14.9 28,763 29,761 30,863 107.8% 107.7% 107.2% 

Un ited States 6,947.0 7,265.4 7,636.0 26,683 27,637 28,784 100.0% 100.0% 100.0% 

*TTR is not a valid indicator of the fiscal capacity of the District of Columbia.

N o te : C a lculated using the most recent data from, Census and BEA: population, GDP, and personal income for 1994 to

1996, and GSP for 1994. Released September 30, 1997.

7
Rationale for the Current Methodology 

The underlying rationale for the current methodology is based on two criticisms of the 

experimental method for estimating TTR5

. The primary concern with the experimental 

methodology is the equal weighting of income just produced in the state, income just received 

within a state, and the income that is both produced and received within the state. “In other 

words, there is an implicit assumption that both producing and receiving states can, with impunity, 

tax interstate income flows at the same rate as flows that remain entirely within their boundaries. 

Even casual observation of the fiscal behavior of the states suggests that this is simply not the 

case.” It is argued that the double counting of the cross-border flows, once where the income is 

produced and again where it is received, causes the experimental methodology to distort the 

estimates of the fiscal capacity of states. 

The second concern relates to the impact that the treatment of cross-border income flows 

has on the fiscal capacity of two states that are combined. The observation was made that 

combining 2 states into one state would reduce the estimated fiscal capacity because of the 

treatment of cross-border flows. “Thus, given the experimental method, TTR is to a significant 

degree an artifact of how political boundaries are drawn.” 

To address these concerns, the current methodology assumes that the cross-border income 

flows are equally shared among the states and aggregate TTR is constrained to equal aggregate 

GSP (GDP). Figure 2 presents three hypothetical scenarios to illustrate how the estimates of 

TTR are currently generated. In scenario one, aggregate TTR equals $250 (the sum of GSP) 

which is allocated among the states according to their average shares of national SPI and GSP. 

Thus, state A’s TTR is $43 and states B’s is $207. 

Constraining aggregate TTR to equal aggregate GSP, and allocating aggregate GSP 

according to the average shares of SPI and GSP addresses the concerns about the impact that 

combining two states has on the estimates of TTR. Scenarios two and three illustrates the impact 

of combining two states (A and B) into one state (D) under the current methodology. Combining 

the states has no impact on total TTR since it is constrained to equal aggregate GSP. The TTR 

estimates for state D is equal to the combined estimates of state A and C since the combined 

average shares of SPI and GSP are the same as the sum of the separate shares. 

A review of the criticisms of the experimental estimates of TTR, which serve as the 

underlying rationale for the current methodology, reveals that they are not justified within the 

conceptual framework. The assumptions made to resolve the perceived shortcomings of the 

5

 See Estimating Total Taxable Resources, memo, Office of Economic Policy, Department of Treasury, July 7, 

1991. 

8
Figure 2 -- General Framework for Estimating TTR Under Current Methodology 

Scenario 1 -- Two States 

STATE A 

SPI=$20 

GSP=$50 

14.3% 

20.0% 

17.1% 

$43 

$250 

Scenario 2 -- Three S tate s 

STATE A 

SPI=$20 

GSP=$50 

9.5% 

15.4% 

12.5% 

$40 

$325 

Share of SPI

Shar e of GSP

Average Share 

TTR

T o tal TTR

STATE B 

SPI=$120 

GSP=$200 

57.1% 

61.5% 

59.3% 

192.9 

$325 

STATE B 

SPI=$120 

GSP=$200 

85.7% 

80.0% 

82.9% 

207.1 

$250 

STATE C 

SPI=$70 

GSP=$75 

33.3% 

23.1% 

28.2% 

91.7 

$325 

STATE D 

SPI=$90 

GSP=$125 

42.9% 

38.5% 

40.7% 

132.1 

$325 

Scenario 3 -- State s A & C are Combined to Equal Stat e D 

STATE B 

SPI=120 

GSP=$200 

57.1% Share of SPI 

61.5% Share of GSP 

59.3% Average Share 

$193 TTR 

$325 T o tal TTR 

9
experimental methodology are arbitrary and yield results that are inconsistent with the original 

conceptual TTR framework. 

Shortcomings of the Current Methodology 

Taxability and Weighting 

Recall that TTR is intended to be an unduplicated comprehensive measure of all of the 

potentially taxable income flows within a state, regardless of the fiscal choices made by states. 

Thus, to be consistent with the original conceptual framework, any measure of TTR must 

disregard the fiscal choices made by states, i.e., the fact some income flows are not taxed at all 

(other labor income) and other flows are given preferential treatment (credit for income taxes paid 

on wages earned in other states) is not relevant. 

A critical shortcoming of the current methodology is that it does not attempt to identify 

the specific cross-border income flows that states can potentially tax. Instead, the current method 

relies on a state’s share of the aggregate income flows produced (GSP) and received (SPI) within 

a state. The current methodology contends that averaging a state’s share of GSP and SPI 

accounts for the cross-border income flows. In reality, this does not reflect a rational accounting 

for cross-border flows since the specific cross-border flows are not identified. In addition, the 

weighting scheme is arbitrary, the average of a State’s GSP and SPI shares has no real meaning -­

it is simply the average of those two numbers. 

Figure 3 presents two hypothetical scenarios to illustrate the arbitrariness of the current 

methodology. The first scenario presents the estimates of TTR for states A and B (identical to 

scenario one in Figure 2). Scenario two shows how these estimates are affected when individuals 

who worked and resided in state B in scenario one, move to state A but continue to work in state 

B. In this scenario, the GSPs for both states remain unchanged, but the income received by the 

residents of both states (SPI) changes. Assuming that the shift in SPI amounts to $20, consider 

what happens to the estimates for TTR. State A’s share of SPI doubles to nearly 29 percent and 

its average share increases to 24 percent. As a result, state A’s TTR increases $18 to $61 and 

state B’s TTR decrease by the same amount. As a result of the movement of residents from state 

B to state A, the States' TTRs change by an arbitrary amount that is not uniquely related to the 

changed flow of resources among them. Rather, the change in estimates is also partly a function 

of the fact that SPI and GSP differ in size because they measure different concepts. 

In addition to the problem just noted, the current methodology is also limited in the sense 

that it only considers the taxability of the cross-border income flows. The current method 

provides no rationale for why the concern about taxability should be limited to cross-border 

income flows. If one wanted to assign different weights to the various income flows, the lack of a 

relatively straightforward theoretical model or empirical findings to determine a weighting 

10
Figure 3 -- The Impact of Shifting $20 in State Personal Income from State B to State A 

Scena rio 1 -- Two S ta tes 

STATE A 

SPI=$20 

GSP=$50 

14.3% S ha re o f SPI 85.7% 

20.0% S ha re o f GSP 80.0% 

17.1% Ave rage Sha re 82.9% 

$43 TTR 207.1 

$250 To ta l TTR $250 

STATE B 

SPI=$120 

GSP=$200 

Scena rio 2 -- Individuals from State B move to State A but continue to work in State B 

STATE A 

SPI=$40 

GSP=$50 

28.6% S ha re o f SPI 71.4% 

20.0% S ha re o f GSP 80.0% 

24.3% Ave rage Sha re 75.7% 

$61 TTR 189.3 

$250 To ta l TTR $250 

STATE B 

SPI=$100 

GSP=$200 

11
scheme is a significant drawback6

. If one wanted to use “taxability” as a means of determining 

weights, the taxability of identical income flows could vary significantly across the states for a 

variety of reasons. It would be nearly impossible for any measure of fiscal capacity to accurately 

reflect the varying degrees of taxability of income flows across states. As a result, any attempt to 

assign weights to the various income flows is likely to be arbitrary and result in distortions among 

the estimates for states. 

At first blush, the inability of TTR (as envisioned in the conceptual framework) to 

discriminate among income flows can be seen as a shortcoming. However, by generating a 

comprehensive measure of income flows, with all flows given equal weight, TTR (within 

conceptual framework) does not rely on arbitrary decisions or rules to determine the taxability of 

income to estimate the fiscal capacity of states. A comprehensive measure precludes the 

possibility of attempting to assign weights to one or two income flows which would logically lead 

to an evaluation of the taxability of all income flows. It is critical to remember that TTR 

addresses the incompleteness of both SPI and GSP as measures of fiscal capacity by accounting 

for all the cross-border flows that states can potentially tax. It is the aggregate income flows and 

the political constraints that ultimately determine the fiscal choices made by states. 

Constraining Aggregate TTR 

It is widely recognized that GSP does not account for all of the income flows that a state 

can potentially tax. Given this, there is no reason that the aggregate measure of TTR should be 

constrained to equal aggregate GSP. It was previously noted that the components added to GSP 

could be greater than the components subtracted from GSP, yielding an estimate for TTR greater 

than GSP. This outcome is logical once one recognizes the cross-border flows associated with 

open state economies and that states can tax these cross-border flows. Constraining aggregate 

TTR to the level of output in the U.S. does not account for the cross-border flows. In sum, there 

is no theoretical rational why aggregate per capita TTR should equal aggregate per capita GSP. 

If total TTR equals total GSP, then one should simply use GSP as a measure of fiscal capacity. 

The current methodology implicitly assumes that all of GSP is taxable by the states. This 

assumption is made at two points - first by constraining aggregate TTR to equal aggregate GSP, 

and second, by distributing aggregate GSP amongst the states by a formula that depends in part 

on a state's share of aggregate GSP. The conceptual TTR framework argues that some of the 

components of GSP are not taxable by the states - such as Federal indirect business taxes and 

social insurance taxes. As a result, the conceptual framework would argue that these income 

flows should not be included in any estimate of TTR. 

6

 The Representative Tax System and the Representative Revenue Systems apply different weights (the average 

national tax rates for various statutory tax bases) to the estimated state tax bases. These approaches apply the 

weights to statutory tax bases, not the income flows utilized in TTR. For a discussion of the shortcomings 

associated with this approach and the use of weights, see Barro. 

12 
It should be noted that the consideration of taxability has nothing to do with the actual 

fiscal choices of the states. Instead, taxability is evaluated on the basis of whether the Federal 

government has the first claim on those resources (social insurance taxes) or if states are 

precluded from taxing those flows (Federal indirect business taxes). 

No Adjustment for the District of Columbia 

No adjustments are made to account for the unique status of the District of Columbia in 

regard to its ability to tax. The underlying premise of TTR is that states have the authority to tax 

the various income flows within their borders. However, the District of Columbia does not have 

the same legal right as the states to tax certain resources. As a result, using the same 

methodology to derive TTR estimates for the District of Columbia is flawed. All of the previous 

per capita TTR index estimates for DC were over 200, indicating that DC had twice the national 

ability to raise revenues from its own sources. It is clear that some adjustments must be made to 

account for DC’s limited ability to tax resources within its borders. 

PROPOSED TTR METHODOLOGY 

Given the shortcomings of the current method of estimating TTR, we returned to the 

original TTR framework for guidance in pursuit of a consistent, theoretically based measure of 

TTR. The theoretically "ideal" estimate entails a direct attempt at identifying the income flows 

that each state could tax, avoiding any double counting of income flows within a given state. The 

original framework begins with in-state production, i.e. GSP, and subtracts components that are 

presumed not taxable by the states to derive modified GSP (MGSP). Various components of 

income that are derived from out-of-state sources are added to MGSP to yield estimates for TTR. 

Table 2 compares the theoretically ideal measure of TTR and the proposed method for estimating 

TTR. 

Subtractions from GSP 

BEA publishes state estimates of GSP and SPI on a regular basis. Unfortunately, data for 

all of the components that should be removed from or added to GSP are not available. These 

data limitations prevent attainment of the theoretically ideal measure of TTR. The following 

components of GSP were deemed not available to the states to tax and hence, were subtracted 

from GSP: 

(1) Federal Indirect Business Taxes: 

Federal indirect business taxes (such as excise taxes on gasoline, alcohol, tobacco, etc., ) and nontax 

liabilities (grazing fees, miscellaneous rents and royalties, etc) are argued to not be a part of TTR on the 

grounds that they are sums paid to the Federal government, and thus are not taxable by the states. 

13
Table 2 -- Comparison of the Theoretically Ideal Measure of TTR with the Proposed Method for Estimating TTR 

Theoretical Measure of TTR 

Gross State Product 

Less: Employer and Employee Contributions to Social Insurance 

Federal Indirect Business taxes 

Depreciation 

Federal Personal Income Taxes 

Federal Corporate Taxes 

Equals: MGSP 

Plus: Federal transfers 

Wages and salaries earned outside of state

Interest earned outside of state

Dividends earned outside of state

Rents & Royalties earned outside of state

Accrued capital gains

Equals: TTR 

E s tim a ted Measure o f TTR 

Gross State Product 

Less: Same 

Same 

Not subtracted -- not estimated on a GSP consistent basis 

Not subtracted -- not estimated on a GSP consistent basis 

Not subtracted -- not estimated on a GSP consistent basis 

Equals: Estimated MGSP 

Plus: Social insurance transfers only -- lack of GSP consistent tax data 

Same 

Includes all interest income reported in SPI 

Includes all dividend income reported in SPI --

Not subtracted - BEA assumes they are intrastate, already in GSP 

Net capital gains 

Equals: Estimated TTR 

14
(2) Employer and Employee contributions for Social Insurance: 

The employer and employee portions of Federal social insurance contributions are viewed in a manner 

analogous to Federal indirect business taxes--as payments to the Federal government not available to the 

states for taxation. Specifically, these transfers include: old age, survivors, and disability payments, 

railroad retirement and disability payments, Federal civilian employee retirement payments, military 

retirement payments, state and local government employee retirement payments, worker’s compensation 

payments (Federal and State), and other government disability insurance and retirement payments. It was 

not possible to separate out the contributions to state employee retirement plans. 

(3) Federal civilian enterprise surpluses: 

This is a minor item, consisting of Federal nonmilitary civilian enterprises surpluses, but is accounted for 

because the data permits. The majority of the surpluses is from insurance premiums less payouts for flood 

and crop insurance. States cannot tax the profits of a Federal enterprise operating within their borders. 

The removal of these components from GSP yields MGSP. 

Additions to MGSP 

As previously noted, MGSP does not account for all of the income flows that states could 

potentially tax. The following income flows are added to MGSP to derive TTR: 

(1) dividends, and monetary interest income earned from sources outside the state 

Ideally, we would only add dividend, interest, rental and royalty income that was earned from 

sources outside of the state. The data however, does not distinguish this income by source, and thus we 

choose to add this income to GSP on the presumption that most of this income comes from out-of-state 

sources and is thus not accounted for in GSP. This implies some double counting of income flows to the 

extent that the dividends and interest stem from home state production. We had originally intended to 

add rents and royalties under the same assumption. However, in generating their estimates for rents and 

royalties, BEA assumes that all rents and royalties are intrastate. As a result, the GSP and SPI estimates 

are identical and adding them to MGSP would just be double counting. 

Dividend income consists of dividends received by individuals and nonprofit institutions and the 

dividends that are received, retained, and reinvested by fiduciaries. Monetary interest income consists of 

reportable interest income; interest income from municipal bonds; interest received by nonprofit 

institutions; and, interest income retained by fiduciaries. 

(2) select transfers from the Federal government 

These transfers are those related to contributions for social insurance that were subtracted from 

GSP. Specifically, these transfers are: old age, survivors, and disability payments, railroad retirement and 

disability payments, Federal civilian employee retirement payments, military retirement payments, state 

and local government employee retirement payments, worker’s compensation payments (Federal and 

State), and other government disability insurance and retirement payments. 

15
(3) Net realized capital gains 

The net realized capital gains are added because they are not accounted for in GSP and they have 

an impact on the ability of a state’s residents to pay taxes. The estimates come from various Statistics of 

Income Bulletins and unpublished IRS estimates. 

(4) the earnings of state residents who work outside the state borders 

We add resident earnings from out-of-state employment to TTR on the grounds that these 

earnings are not accounted for in the resident’s “home” state estimates of GSP. See the discussion below 

regarding specific modifications for the District of Columbia. The BEA estimates for resident earnings 

from out-of-state employment includes wage and salary income plus other labor income, less personal 

social insurance contributions. 

Since the District of Columbia is proscribed by Federal law from taxing the earnings of 

commuters from outside its borders, we have also subtracted the earnings of non-residents. The 

adjustment for the District of Columbia is equal to the net residence adjustment and results in a 

substantial reduction in the MGSP of the District of Columbia. Given the complex tax 

circumstances in the District, the resulting estimates of TTR should be used with caution. 

Some have argued that adding commuter income to the resident’s “home” state overstates 

the fiscal capacity of that state for two reasons. First, the state were the income is earned has first 

claim on those resources and hence, they are not available to the resident’s home state for tax 

purposes. Second most, it not all states, give a credit for income taxes paid in other states. The 

response to these arguments is simple and has been stated throughout this paper: TTR is defined 

as the unduplicated sum of income flows that a state can potentially tax, regardless of the fiscal 

choices made by the states. Since states are not precluded from taxing wage and salary income 

earned in other states, commuter income is included in TTR. 

The proposed methodology for estimating TTR does not account for all of the 

components in the theoretically ideal measure of TTR. The components that are not included in 

the proposed methodology are discussed below. 

Federal Government---Income Taxes and Transfers 

The appropriate measure of a State’s TTR ought to exclude all taxes paid to the Federal 

government and include all transfers from the Federal government. This treatment would capture 

the net flow of resources between a given state and the Federal government and accurately reflect 

a state’s fiscal capacity. The presumption for excluding Federal tax payments is that these 

resources are not available to the state to tax while the transfers are assumed to augment a state’s 

ability to raise revenues. While Federal transfers can be readily accounted for, the data on Federal 

income and corporate taxes by state, particularly that for the corporate income tax, is not 

estimated on a GSP basis, by state of production. Federal individual income tax figures by state 

of residence may be more consistent with GSP data than corporate income tax data, but it still 

16
can’t identify the true sources of dividend or interest income, or even employment income. Given 

the data limitations, the proposed methodology does not adjust for income tax payments to the 

Federal government and only includes Federal transfer payments for which the corresponding 

taxes can be identified (e.g. social insurance contributions). 7 

The decision not to account for all transfers is predicated on the decision not to adjust for 

Federal taxes. If the outflow of resources from a given state to the Federal government are not 

accounted for, incorporating all of the inflows from Federal transfer payments would overestimate 

TTR for all of the states. The key problem is that there could be wide divergences in the extent of 

the overestimation depending on the differences in the net flow among the states. For example, 

take two hypothetical states, A and B. Assume that state A makes $100 in Federal tax payments 

and receives $50 in Federal transfers and state B makes $50 in Federal tax payments and receives 

$100 in Federal transfers. If one fully accounts for the net flow, state A’s TTR would be reduced 

by $50 and B’s would be increased by $50. However, if only the transfers are accounted for, 

State A’s TTR would be overestimated by $100, while state B’s TTR would be overestimated by 

$50. This hypothetical example illustrates the potential impacts on TTR of not incorporating the 

net flow of resources between the states and the Federal governments. Studies estimating the net 

flow of resources indicate large variation across the states which would imply serious 

shortcomings to estimates of TTR that only include Federal transfers8

. 

The original theoretical TTR framework included all Federal transfers except grants-in-aid 

in TTR. Although the original estimates of TTR excluded grants-in-aid, the analysis argued that 

all Federal transfers should be included in TTR.9 Under either of these methods it is conceivable 

that a state making relatively large Federal tax payments (not accounted for in TTR) that also 

receives relatively large Federal transfer payments (counted in TTR) could be adversely affected. 

Such a state would be making relatively large tax payments and be required to pay more for block 

grants because of a higher measure of fiscal capacity. 

Capital Consumption 

It would be desirable to subtract capital consumption from GSP in determining TTR. 

7

 An additional issue is the deductibility of state and local income taxes and property taxes from Federal income 

tax liabilities. As a result, state fiscal choices have an impact on the Federal income taxes paid by its residents. 

Even if the Federal income tax data was measured on a GSP consistent basis and hence, could be removed from 

GSP, the relative state advantages of deductibility would not be reflected. Since we are unaware of any method for 

estimating the relative deductibility among states, one would have to assume that states are equally inclined to levy 

deductible taxes to finance the provision of public goods. Thus, accounting for the effect of Federal taxes on the 

state tax base (TTR) is not particularly straightforward even on theoretical grounds, and thus the decision to ignore 

Federal income taxes and transfers may be best. 

8

 See Jay Walder and Herman Leonard, The Federal Budget and the States Fiscal Year 1996. 

9

 See Sawicky pages 66 and 92 and Carnevale page 129 for further details of this issue. 

17 
However, we are unable to do so because we do not have data on capital consumption by state. 

As a result, we have implicitly assumed there is a proportional relationship between GSP, the 

income produced within a given state, and capital consumption. 

Other Labor Income 

Some might argue that our measure of TTR is too high because some of the components 

of labor income, such as employer contributions for pensions or health insurance, are not taxed by 

states. Since states are not prohibited from taxing these sources of income, these income flows 

are potentially taxable, and therefore included in TTR. 

THE PROPOSED ESTIMATES OF TTR 

Under the proposed new method, TTR estimates for a given year will only be made when 

both GSP and SPI data are available for that year. This contrasts with the current method, which 

produces TTR estimates for the latest year for which SPI data is available, even though GSP data 

for that year is not available.10 The primary reason for this change is that the new method uses 

GSP as a base, and adds to and subtracts from that base various components. The mixing of 

different years of data for the various components would be inappropriate. 

Table 3 reveals the data used to estimate TTR under the current methodology and the 

proposed method. Each year, the current methodology generates estimates of TTR for three 

years using the last three years of available data for SPI and the most recent available year of data 

for GSP. For example, the TTR estimates for 1992-1994, which were released on September 22, 

1995, used 1992-94 SPI estimates and 1992 estimates for GSP. As a result of this three-year 

estimate procedure and the lagged release of GSP data, the current methodology will, over time, 

generate three different estimates of TTR for a given year.11 For example, estimates for 1992 

TTR were generated in 1993, 1994, and 1995. However, the estimates produced in 1995 are the 

only ones where SPI and GSP are from the same year. The proposed method will, by contrast, 

release TTR figures for a given year only when both GSP and SPI data are available. As a result, 

the estimates will not change in future years unless the underlying series are revised, creating a 

consistent time series of estimates. The advantages of the proposed methodology relative to the 

current method for estimating TTR are summarized in Table A1 in the appendix. 

10 Although BEA usually estimates GSP and SPI on a yearly basis, there is typically a one year lag in the SPI 

estimates and a three year lag in the GSP estimates. As a result, the latest estimate for GSP is typically two years 

behind the latest estimate for SPI. 

11This makes it very difficult to generate a consistent time series of TTR estimates. 

18 
Table 3 -- Source and Year of Data Used to Estimate TTR 

D ata Used in Curr e n t Me thodology for Estimating TTR 

R e le as e D ate August 24, 1994 S e p te mbe r 22, 1995 S e p te mbe r 27, 1996 

E stimate Yea r TTR 1991 1992 1993 TTR 1992 1993 1994 TTR 1993 1994 1995 

Based on 

D ata Sourc e/Ye ar PI 1991 1992 1993 PI 1992 1993 1994 PI 1993 1994 1995 

GSP 1991 1991 1991 GSP 1992 1992 1992 GSP 1992 1992 1992 

D ata Used in Propos e d Me thodology for Estimating TTR 

R e le as e D ate August 1994 S e p te mbe r 1995 S e p te mbe r 1997* 

E stimate Yea r TTR 1991 TTR 1992 TTR 1993 

Based on 

D ata Sourc e/Ye ar PI 1991 PI 1992 PI 1993 

GSP 1991 GSP 1992 GSP 1993 

* BEA re leased the 1993 e stimate s for GSP in June 1997 and the most recen t estimates for SPI in September 1997. 

19
Table 4 presents the TTR estimates generated from the proposed methodology. This 

method is likely to cause some initial confusion since the new estimates would be for 1992-94 and 

the most recent estimates using the current methodology (released September 30, 1997) are for 

1994-96. The users of the TTR estimates are probably unaware of the use of dated GSP 

estimates in the current methodology for generating TTR, and questions will undoubtedly be 

raised. One could argue that by not using the most recent SPI data, the proposed method will not 

reflect the present economic conditions of a state as well as the current method. However, the 

current method does not fully reflect the present economic conditions of a state since it too, relies 

on lagged GSP data. Given the use of various components of GSP and SPI in the new 

methodology, it is important to use consistent same year data to generate TTR estimates.12 

Table 5 shows how the proposed methodology for estimating TTR would affect the per 

capita TTR index estimates. A comparison of the proposed estimates (1992-1994) and the most 

recent estimates using the current methodology (1994-1996) would involve different years of data 

which would have an obvious impact on the estimates. To isolate the impact of the differences in 

methodologies, a new set of estimates was generated using the current methodology and same 

year data for GSP and SPI (1992-1994). 

Table 5 shows the estimated per capita TTR index under the current and proposed 

method, as well as the difference between the two estimates. A positive number implies that a 

state’s relative TTR per capita index has risen, a negative number implies that it has fallen. Some 

states, such as Alaska, Wyoming, and Delaware show large increases in TTR because their GSP 

relative to SPI is disproportionately large, and the current methodology simply splits this 

difference by averaging a state’s GSP and SPI shares.13 Others, such as New Hampshire and New 

Jersey, show increases due to sizable cross-border inflows from residents working in other states. 

Few states show a substantial decrease other than the District of Columbia, whose TTR is 

calculated differently from the States, as discussed previously. 

CONCLUSION 

The review of Treasury’s current methodology for estimating TTR reveals that it is 

inconsistent with the original theoretical framework and the experimental estimates of TTR. The 

assumptions made in the current method to address the perceived shortcomings of the 

12 An alternative approach to estimating TTR would be to follow the proposed methodology, only gross up the 

GSP data to the year of the SPI data by the growth in SPI over the same period. This would eliminate the 

transition problem (i.e., retracting some outstanding TTR estimates) from the current method. However, it would 

not correct other problems present in the current method, such as the generation over time of several different 

estimates of TTR for a given year, as actual GSP figures replace estimated ones in the older estimates. An 

advantage of the proposed method is that TTR estimates for a given year would only change if the underlying data 

series were revised by BEA. 

13 Table A2 in the appendix presents the states’ shares of SPI, GSP, and the proposed estimates of TTR as a 

percentage of the state’s GSP. 

20 
Table 4 -- Proposed Estimates of Total Taxable Resources (TTR) 

Total $ Billions Per Capita $ Per Capita Index 

1992 1993 1994 1992 1993 1994 1992 1993 1994 

Alabama 85.2 88.5 94.3 20,366 20,994 22,206 79.3 78.8 79.4 

Alaska 21.8 24.6 22.4 36,426 40,880 37,255 141.8 153.5 133.2 

Arizona 86.0 92.5 102.5 21,802 22,662 23,821 84.9 85.1 85.1 

Arkansas 48.0 50.5 54.6 19,793 20,566 21,987 77.1 77.2 78.6 

California 866.8 883.5 918.0 27,808 28,170 29,083 108.3 105.8 104.0 

Co lorado 90.1 98.1 105.7 25,250 26,790 28,210 98.3 100.6 100.8 

Connec ticut 116.4 120.7 125.0 35,527 36,892 38,219 138.3 138.5 136.6 

De laware 25.6 26.6 29.0 36,638 37,608 40,506 142.7 141.2 144.8 

D istrict of Columbia* 23.3 24.2 24.3 40,291 42,620 43,830 156.9 160.1 156.7 

Florida 329.0 350.0 371.0 23,991 25,066 26,159 93.4 94.1 93.5 

Georg ia 164.2 175.7 189.2 23,774 24,882 26,242 92.6 93.4 93.8 

Hawaii 35.8 37.1 37.6 30,828 31,625 31,920 120.0 118.8 114.1 

Idaho 22.2 24.4 26.5 20,167 21,493 22,705 78.5 80.7 81.2 

I llino is 322.3 337.0 358.6 27,616 28,721 30,410 107.5 107.9 108.7 

Ind iana 130.1 137.4 148.6 22,805 23,903 25,641 88.8 89.8 91.7 

Iowa 66.3 68.1 74.8 23,472 24,049 26,304 91.4 90.3 94.0 

Kansas 63.3 65.5 69.2 24,997 25,687 27,008 97.3 96.5 96.5 

Ken tucky 81.1 85.4 91.3 21,369 22,320 23,670 83.2 83.8 84.6 

Louisiana 93.5 97.0 104.1 21,808 22,483 23,997 84.9 84.4 85.8 

Maine 26.5 27.6 28.8 21,393 22,303 23,279 83.3 83.8 83.2 

Maryland

Massachusetts

Michigan

Minnesota

Mississippi

Missouri

Montana

Nebraska

Nevada

New Hampshire

142.7 149.4 159.0 28,816 29,881 31,545 112.2 112.2 112.8 

179.7 189.6 201.3 29,861 31,374 33,153 116.3 117.8 118.5 

217.9 232.7 256.5 23,055 24,535 26,894 89.8 92.1 96.1 

117.1 121.5 131.1 25,881 26,576 28,404 100.8 99.8 101.5 

47.3 50.0 54.7 17,912 18,740 20,291 69.7 70.4 72.5 

125.9 129.7 139.8 24,066 24,590 26,279 93.7 92.3 93.9 

17.0 18.1 19.0 20,218 21,151 21,795 78.7 79.4 77.9 

39.9 40.9 43.9 24,706 25,175 26,772 96.2 94.5 95.7 

39.5 43.2 47.8 28,458 29,537 31,197 110.8 110.9 111.5 

32.0 33.4 35.7 28,509 29,397 31,071 111.0 110.4 111.1 

New Jersey 

New Mex ico 

New York 

North Carolina 

North Dako ta 

O h io 

O k lahoma 

Oregon 

Pennsylvania 

Rhode Island 

268.4 282.2 293.1 34,150 35,693 36,867 133.0 134.0 131.8 

33.7 36.3 40.0 20,796 21,902 23,645 81.0 82.3 84.5 

567.7 586.7 615.9 31,244 32,241 33,861 121.7 121.1 121.0 

165.7 174.1 186.6 23,808 24,590 25,914 92.7 92.3 92.6 

13.6 13.7 14.6 21,294 21,437 22,732 82.9 80.5 81.3 

265.3 277.1 295.5 23,988 24,969 26,541 93.4 93.8 94.9 

66.5 69.1 72.1 20,581 21,236 22,008 80.1 79.8 78.7 

69.7 75.7 81.3 22,914 24,458 25,821 89.2 91.9 92.3 

300.3 314.1 327.8 24,956 26,048 27,180 97.2 97.8 97.2 

26.0 27.0 27.7 25,954 27,090 27,933 101.1 101.7 99.8 

South Carolina 75.5 79.8 85.2 20,822 21,918 23,223 81.1 82.3 83.0 

South Dakota 16.3 17.6 18.7 22,755 24,265 25,636 88.6 91.1 91.6 

Tennessee 115.3 122.2 132.5 22,657 23,642 25,248 88.2 88.8 90.2 

Texas 442.2 465.1 497.1 24,476 25,231 26,438 95.3 94.8 94.5 

U tah 36.6 39.4 43.2 19,631 20,611 22,059 76.4 77.4 78.9 

Vermont 13.5 14.1 14.8 23,413 24,306 25,240 91.2 91.3 90.2 

Virginia 177.5 187.4 196.8 27,416 28,616 29,742 106.8 107.5 106.3 

Wash ington 139.4 147.5 155.6 26,495 27,564 28,555 103.2 103.5 102.1 

Wes t Virginia 35.3 36.9 39.4 19,386 20,266 21,597 75.5 76.1 77.2 

W isconsin 120.6 127.9 135.9 23,903 25,152 26,531 93.1 94.5 94.8 

Wyoming 14.8 15.6 16.4 31,491 32,825 34,228 122.6 123.3 122.4 

U n ited State s 6,620.2 6,932.7 7,354.5 25,681 26,628 27,975 100.0 100.0 100.0 

* Caution should be used when interpreting the estimates for Washington D.C. See text for discussion of DC estimates. 

21
Table 5 -- Comparison of TTR Per Capita Index Between 

Current Method Using Same Year Data and Proposed Method 

Current Method Same Year Data Proposed Method Proposed Less Current Method 

1992 1993 1994 1992-94 1992 1993 1994 1992-94 1992 1993 1994 1992-94 

Alabama 81.0 80.6 81.4 81.0 79.3 78.8 79.4 79.2 (1.7) (1.8) (2.0) (1.9) 

Alaska 132.3 137.2 124.9 131.5 141.8 153.5 133.2 142.8 9.6 16.3 8.3 11.4 

Arizona 85.7 86.5 88.0 86.7 84.9 85.1 85.1 85.0 (0.8) (1.4) (2.8) (1.7) 

Arkansas 76.8 77.0 77.9 77.2 77.1 77.2 78.6 77.6 0.3 0.2 0.7 0.4 

California 109.6 106.9 105.1 107.2 108.3 105.8 104.0 106.0 (1.3) (1.1) (1.1) (1.2) 

Colorado 102.3 104.4 104.0 103.6 98.3 100.6 100.8 99.9 (4.0) (3.8) (3.1) (3.6) 

Connecticut 134.1 133.9 132.9 133.6 138.3 138.5 136.6 137.8 4.3 4.6 3.7 4.2 

De laware 126.8 125.6 127.6 126.7 142.7 141.2 144.8 142.9 15.9 15.6 17.2 16.2 

District of Columbia 229.8 234.1 231.6 231.9 156.9 160.1 156.7 157.9 (73.0) (74.1) (75.0) (74.0) 

Florida 91.6 93.5 92.8 92.7 93.4 94.1 93.5 93.7 1.8 0.6 0.7 1.0 

Georgia 94.6 95.6 96.0 95.4 92.6 93.4 93.8 93.3 (2.1) (2.1) (2.2) (2.1) 

Hawaii 119.2 118.5 114.4 117.4 120.0 118.8 114.1 117.6 0.8 0.3 (0.3) 0.3 

Idaho 79.5 82.1 81.7 81.1 78.5 80.7 81.2 80.1 (1.0) (1.3) (0.5) (0.9) 

Illinois 107.7 107.9 108.6 108.1 107.5 107.9 108.7 108.0 (0.2) (0.0) 0.1 (0.0) 

Indiana 89.8 91.0 92.7 91.2 88.8 89.8 91.7 90.1 (1.0) (1.2) (1.0) (1.1) 

Iowa 88.9 87.2 91.1 89.1 91.4 90.3 94.0 91.9 2.5 3.1 2.9 2.8 

Kansas 93.8 93.4 93.1 93.4 97.3 96.5 96.5 96.8 3.5 3.1 3.5 3.4 

Kentucky 82.7 83.0 83.5 83.1 83.2 83.8 84.6 83.9 0.5 0.8 1.1 0.8 

Louisiana 84.0 84.3 85.5 84.6 84.9 84.4 85.8 85.0 1.0 0.1 0.3 0.4 

Maine 84.2 84.0 83.6 83.9 83.3 83.8 83.2 83.4 (0.9) (0.3) (0.3) (0.5) 

Maryland 107.6 107.5 107.8 107.7 112.2 112.2 112.8 112.4 4.6 4.7 4.9 4.7 

Massachusetts 117.1 117.8 118.5 117.8 116.3 117.8 118.5 117.5 (0.8) (0.0) 0.0 (0.3) 

Michigan 93.3 95.7 99.4 96.1 89.8 92.1 96.1 92.7 (3.5) (3.6) (3.3) (3.5) 

Minnesota 102.8 101.6 103.5 102.6 100.8 99.8 101.5 100.7 (2.0) (1.8) (2.0) (1.9) 

Mississippi 68.9 70.0 72.0 70.3 69.7 70.4 72.5 70.9 0.9 0.4 0.5 0.6 

Missouri 92.5 91.8 93.1 92.5 93.7 92.3 93.9 93.3 1.2 0.6 0.8 0.9 

Montana 78.3 79.8 77.3 78.5 78.7 79.4 77.9 78.7 0.5 (0.4) 0.6 0.2 

Nebraska 94.7 93.8 94.5 94.3 96.2 94.5 95.7 95.5 1.5 0.7 1.2 1.1 

Nevada 109.0 109.4 110.0 109.4 110.8 110.9 111.5 111.1 1.8 1.5 1.5 1.6 

New Hampshire 102.8 102.2 104.0 103.0 111.0 110.4 111.1 110.8 8.2 8.2 7.1 7.8 

New Jersey 126.8 127.3 125.8 126.6 133.0 134.0 131.8 132.9 6.2 6.8 6.0 6.3 

New Mexico 80.0 81.5 82.2 81.2 81.0 82.3 84.5 82.6 1.0 0.8 2.4 1.4 

New York 120.6 119.6 119.1 119.8 121.7 121.1 121.0 121.3 1.0 1.5 1.9 1.5 

North Carolina 93.3 93.8 93.9 93.7 92.7 92.3 92.6 92.6 (0.6) (1.5) (1.2) (1.1) 

North Dakota 82.1 79.9 81.3 81.1 82.9 80.5 81.3 81.6 0.8 0.6 (0.0) 0.5 

Oh io 93.7 94.1 95.3 94.4 93.4 93.8 94.9 94.0 (0.3) (0.3) (0.5) (0.4) 

Ok lahoma 80.7 80.6 79.4 80.2 80.1 79.8 78.7 79.5 (0.5) (0.8) (0.7) (0.7) 

Oregon 89.6 91.3 92.1 91.0 89.2 91.9 92.3 91.1 (0.4) 0.5 0.2 0.1 

Pennsylvania 97.7 98.0 97.2 97.6 97.2 97.8 97.2 97.4 (0.5) (0.2) 0.0 (0.2) 

Rhode Island 97.0 97.8 96.1 97.0 101.1 101.7 99.8 100.9 4.0 3.9 3.8 3.9 

South Carolina 81.1 81.8 82.7 81.9 81.1 82.3 83.0 82.1 (0.0) 0.5 0.3 0.3 

South Dakota 85.5 86.8 87.7 86.7 88.6 91.1 91.6 90.5 3.1 4.3 3.9 3.8 

Tennessee 89.5 90.4 92.0 90.6 88.2 88.8 90.2 89.1 (1.3) (1.6) (1.7) (1.5) 

Texas 95.8 95.7 95.3 95.6 95.3 94.8 94.5 94.9 (0.5) (1.0) (0.8) (0.8) 

Utah 78.4 79.5 80.5 79.5 76.4 77.4 78.9 77.6 (2.0) (2.1) (1.7) (1.9) 

Vermont 90.2 90.1 89.3 89.9 91.2 91.3 90.2 90.9 0.9 1.2 0.9 1.0 

Virginia 104.0 104.6 103.8 104.1 106.8 107.5 106.3 106.8 2.8 2.9 2.5 2.7 

Washington 104.1 103.8 102.5 103.5 103.2 103.5 102.1 102.9 (0.9) (0.3) (0.4) (0.6) 

Wes t Virginia 73.3 73.7 74.5 73.9 75.5 76.1 77.2 76.3 2.2 2.4 2.7 2.4 

W isconsin 93.1 94.1 94.7 94.0 93.1 94.5 94.8 94.1 (0.0) 0.4 0.1 0.2 

Wyoming 108.8 109.5 107.8 108.7 122.6 123.3 122.4 122.7 13.8 13.8 14.6 14.1 

United States 100.0 100.0 100.0 100.0 100.0 100.0 100.0 

Basic statistics including Washington DC Minimum (72.96) (74.05) (74.97) (73.99) 

Maximum 15.89 16.35 17.17 16.23 

Average (0.10) (0.00) (0.13) (0.08) 

Median 0.46 0.38 0.26 0.28 

Basic statistics excluding Washington DC Minimum (4.00) (3.78) (3.28) (3.63) 

Maximum 15.89 16.35 17.17 16.23 

Average 1.36 1.48 1.37 1.40 

Median 0.46 0.39 0.28 0.35 

Number of States with Percentage Point Less (+-) 1 20 21 21 20 

Change in Index (+-) 1 to less than (+-) 2 12 12 9 14 

(+-) 2 to less than (+-) 3 6 4 8 4 

(+-) 3 to less than (+-) 5 7 8 7 7 

(+-) 5 and above 6 6 6 6 

22
experimental estimates of TTR are arbitrary and lack any theoretical foundation. As a result, this 

analysis proposes a new, better methodology for estimating TTR that more accurately reflects the 

underlying theory of the original conceptual framework of TTR. 

23
BIBLIOGRAPHY

1) Barro, Stephen, Improved Measures of State Fiscal Capacity: Short-Term Changes in the 

PCI and the RTS Index, in the Federal-State-Local Fiscal Relations: Technical Papers, 

Volume 2, Office of State and Local Finance, Department of Treasury, September 1986. 

2) Barro, Stephen, State Fiscal Capacity Measures: A Theoretical Critique, in Measuring 

Fiscal Capacity, editor H. Clyde Reeves, 1986. 

3) Carnevale, John, Experimental Estimates of Total Taxable Resources, 1981-84, in the 

Federal-State-Local Fiscal Relations: Technical Papers, Volume 2, Office of State and 

Local Finance, Department of Treasury, September 1986. 

4) Chapter VIII. Measuring the Fiscal Capacity of States and of Local Governments, in 

Federal-State-Local Fiscal Relations: Report to the President and Congress, Office of 

State and Local Finance, Department of Treasury, September 1985. 

5) Estimating Total Taxable Resources, memo, Office of Economic Policy, Department of 

Treasury, July 7, 1991. 

6) Measuring State Fiscal Capacity, 1987 Version, Advisory Commission on 

Intergovernmental Relations, December 1987, Washington D.C. 205575. 

7) Medicaid: Matching Formula’s Performance and Potential Modifications, GAO/THEHS-95-226, July 27, 1995. 

8) Sawicky, Max, The Total Taxable Resources Definition of State Revenue-Raising Ability, 

in the Federal-State-Local Fiscal Relations: Technical Papers, Volume 2, Office of State 

and Local Finance, Department of Treasury, September 1986. 

9) School Finance: Options for Improving Measures of Effort and Equity in Title 1, 

GAO/HEHS-96-142, August 30, 1996. 

10) Walder, Jay, and Herman Leonard, The Federal Budget and the States Fiscal Year 1996, 

September 30, 1996. 

24
Table A1 -- Comparison of the Current and Proposed Methodologies 

Advantages of Proposed Methodology over Current Method 

C Consistent with the original conceptual framework for TTR 

C Comprehensive measure of potentially taxable income flows, addresses the lack of 

completeness associated with SPI and GSP. 

C Does not consider the actual fiscal policies of states. A key rationale for the current 

methodology was the improper treatment of cross-border income flows in the 

experimental estimates of TTR. 

C Does not mix years of data for GSP and SPI. Estimates will only change if the underlying 

data series is revised, generating a consistent time series of estimates. 

C Makes specific adjustments to account for the unique tax status of the District of 

Columbia. 

Shortcomings of Proposed Methodology 

C Unable to identify all of the separate components needed to derive the theoretically ideal 

measure of TTR. Some assumptions had to be made regarding the treatment of dividend 

and interest income earned outside the state. Relative to the current methodology, this is 

not a shortcoming since the current method does not attempt to identify the cross-border 

income flows. 
Table A2 -- State Shares of SPI, GSP, and TTR as a Share of GSP 

Current Methodology Proposed Me thod 

State Share of Total SPI State Share of Total GSP TTR as a Share of the State's GSP 

1992 1993 1994 1992 1993 1994 1992 1993 1994 

Alabama 1.33% 1.33% 1.34% 1.30% 1.28% 1.30% 106.8% 107.1% 106.3% 

Alaska 0.25% 0.25% 0.24% 0.36% 0.39% 0.33% 97.9% 98.3% 98.8% 

Arizona 1.30% 1.34% 1.38% 1.28% 1.31% 1.38% 109.7% 109.5% 109.0% 

Arkansas 0.72% 0.72% 0.73% 0.72% 0.73% 0.74% 108.6% 108.2% 108.0% 

California 13.06% 12.75% 12.50% 13.47% 13.09% 12.81% 104.9% 104.9% 104.8% 

Colorado 1.39% 1.44% 1.47% 1.39% 1.45% 1.46% 105.4% 105.3% 106.0% 

Connecticut 1.77% 1.75% 1.73% 1.67% 1.65% 1.62% 113.4% 113.6% 113.2% 

De laware 0.30% 0.30% 0.30% 0.38% 0.38% 0.39% 109.4% 109.4% 108.8% 

D istrict of Columbia 0.32% 0.32% 0.31% 0.74% 0.74% 0.70% 51.6% 51.2% 50.6% 

Florida 5.15% 5.31% 5.31% 4.56% 4.64% 4.65% 117.6% 117.3% 116.7% 

Georg ia 2.44% 2.48% 2.53% 2.59% 2.65% 2.68% 103.4% 103.3% 103.3% 

Hawaii 0.50% 0.50% 0.49% 0.57% 0.56% 0.54% 102.2% 102.3% 102.5% 

Idaho 0.34% 0.36% 0.36% 0.33% 0.35% 0.35% 110.5% 109.8% 109.5% 

Illinois 4.93% 4.91% 4.92% 4.86% 4.86% 4.87% 108.0% 107.8% 107.7% 

Indiana 2.02% 2.05% 2.07% 1.96% 1.98% 2.02% 108.2% 107.9% 107.6% 

Iowa 0.98% 0.95% 0.98% 0.98% 0.96% 1.00% 110.7% 110.5% 109.5% 

Kansas 0.93% 0.93% 0.92% 0.92% 0.90% 0.90% 112.7% 112.7% 112.1% 

Kentucky 1.20% 1.19% 1.19% 1.24% 1.25% 1.27% 106.6% 106.2% 105.6% 

Louisiana 1.33% 1.34% 1.35% 1.48% 1.47% 1.48% 103.0% 102.8% 103.0% 

Maine 0.42% 0.42% 0.41% 0.39% 0.39% 0.38% 110.3% 110.1% 110.6% 

Maryland 2.20% 2.19% 2.20% 1.94% 1.94% 1.94% 119.8% 119.9% 119.8% 

Massachusetts 2.81% 2.78% 2.77% 2.70% 2.72% 2.72% 108.4% 108.4% 108.1% 

Michigan 3.59% 3.64% 3.73% 3.30% 3.38% 3.52% 107.6% 107.2% 106.7% 

Minnesota 1.80% 1.78% 1.81% 1.80% 1.79% 1.82% 105.9% 105.5% 105.2% 

Mississippi 0.70% 0.72% 0.74% 0.71% 0.72% 0.74% 109.1% 108.6% 108.1% 

Missouri 1.90% 1.88% 1.90% 1.87% 1.84% 1.88% 109.8% 109.4% 109.0% 

Montana 0.26% 0.27% 0.26% 0.25% 0.25% 0.25% 112.8% 112.3% 112.5% 

Nebraska 0.59% 0.58% 0.58% 0.61% 0.59% 0.61% 107.4% 107.1% 106.1% 

Nevada 0.55% 0.57% 0.59% 0.59% 0.61% 0.64% 109.5% 110.1% 108.8% 

New Hampshire 0.47% 0.47% 0.48% 0.43% 0.42% 0.43% 122.6% 122.6% 121.4% 

New Jersey 4.00% 3.95% 3.91% 3.77% 3.81% 3.73% 116.0% 115.3% 115.0% 

New Mexico 0.48% 0.49% 0.49% 0.52% 0.53% 0.55% 106.0% 105.7% 105.6% 

New York 8.56% 8.41% 8.30% 8.57% 8.44% 8.35% 108.0% 108.1% 107.9% 

North Carolina 2.38% 2.43% 2.45% 2.63% 2.64% 2.66% 102.6% 102.6% 102.8% 

North Dakota 0.20% 0.20% 0.20% 0.21% 0.20% 0.20% 107.8% 108.4% 108.1% 

Oh io 4.09% 4.09% 4.11% 3.99% 3.98% 4.02% 108.3% 108.2% 107.5% 

Ok lahoma 1.03% 1.03% 1.02% 1.00% 0.99% 0.97% 108.5% 108.0% 108.9% 

Oregon 1.06% 1.08% 1.10% 1.03% 1.07% 1.09% 110.0% 109.9% 109.3% 

Pennsylvania 4.79% 4.76% 4.69% 4.39% 4.39% 4.31% 111.5% 111.4% 111.3% 

Rhode Island 0.40% 0.40% 0.39% 0.36% 0.36% 0.35% 115.9% 115.8% 116.1% 

South Carolina 1.13% 1.13% 1.14% 1.16% 1.17% 1.17% 106.1% 106.3% 106.5% 

South Dakota 0.23% 0.23% 0.24% 0.24% 0.25% 0.25% 109.3% 109.0% 108.4% 

Tennessee 1.74% 1.77% 1.80% 1.78% 1.79% 1.85% 105.7% 105.9% 104.7% 

Texas 6.36% 6.45% 6.48% 6.94% 6.97% 7.02% 103.8% 103.7% 103.6% 

U tah 0.54% 0.56% 0.57% 0.58% 0.59% 0.61% 103.6% 103.8% 103.7% 

Vermont 0.21% 0.20% 0.20% 0.20% 0.20% 0.19% 110.6% 110.8% 111.1% 

Virginia 2.59% 2.62% 2.62% 2.62% 2.63% 2.60% 110.6% 110.6% 110.7% 

Washington 2.10% 2.11% 2.11% 2.10% 2.12% 2.10% 108.2% 108.0% 108.1% 

Wes t Virginia 0.54% 0.54% 0.54% 0.50% 0.50% 0.51% 115.1% 115.0% 113.8% 

W isconsin 1.85% 1.85% 1.87% 1.80% 1.83% 1.83% 109.2% 108.6% 108.4% 

Wyoming 0.17% 0.17% 0.16% 0.23% 0.23% 0.23% 104.7% 105.3% 104.7% 

United States 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 107.9% 107.8% 107.6% 

Minimum 0.17% 0.17% 0.16% 0.20% 0.20% 0.19% 51.57% 51.19% 50.61% 

Maximum 13.06% 12.75% 12.50% 13.47% 13.09% 12.81% 122.56% 122.61% 121.38% 

Average 1.96% 1.96% 1.96% 1.96% 1.96% 1.96% 107.75% 107.64% 107.37% 

Median 1.20% 1.19% 1.19% 1.24% 1.25% 1.27% 108.37% 108.21% 108.10% 

26