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Tight State and Local Budgets: Blame China?

Posted by: Michael Mandel on June 03

In my house we have a rule—anything that goes wrong gets blamed on my teenage son.

In the same way, China gets blamed for all the problems with the U.S. economy.

But here’s something surprising that China, indirectly, may really be responsible for—tight state and local budgets. The problem is that state and local tax revenues have fallen as a share of GDP, compared to the 1990s. The decline is roughly 0.2 percentage points of GDP, or about $25 billion in missing revenues.

The shortfall comes almost totally from sales taxes, not property taxes or income taxes.

What’s happening is that prices of goods such as clothing—which are almost always taxed—have risen much less than the prices of services, many of which are exempt from sales tax. Lower prices, lower sales tax revenues.

And why are the prices of all sort of goods so cheap? Why, it’s the low-cost Chinese imports.

So when your local school board has to cut after-school activities because of a lack of money—remember, it’s just the global law of unintended consequences at work.

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Reader Comments

e m butler

June 3, 2005 03:57 PM

I just read a headline that the states are wallowing in money (again) your article is written to show the states lost money cause prices could have been higher??

if the prices had been higher ,total sales would have been lower and therefore the states would have lost money (again?)..tsk tsk

Patrick R. Sullivan

June 3, 2005 06:11 PM

Uh, lower priced goods mean you can buy more of them.

Michael Mandel

June 5, 2005 10:03 PM

Some states have a surplus, but there's still a big squeeze.

Dave Dearmont

June 6, 2005 11:54 AM

In 2000, Bruce and Fox at the University of Tennessee estimated a loss of combined state and local sales tax revenues of $23.9 billion in 2003 due to erosion of sales tax bases and e-commerce. $20.1 billion is e-commerce alone. The paper is at


June 15, 2005 03:40 PM

Your don't seem to have a grasp on the enormous funding available to all state and local governments. Through natural population growth governments always have increasing budgets which most people fail to understand. So with out ever having a tax increase government get a pay raise every year. Also, due ever increasing property values, governments are enjoying a tremendous increase in property taxes. Never let the government mislead you to think they are short on revenues.

Robert Cope

June 23, 2005 05:26 AM

I think tax free internet sales is not conducive to proper roles in society maybe less but certainly within perspective. ,or a yearly stamp tax ,we must fill state coffers. .higher property taxes is moronic and distorts income.


June 24, 2005 03:31 PM

What about the effect of rising housing costs on property taxes? One would think that would easily offset the loss of sales tax revenues.


June 29, 2005 04:19 PM

Oh, this is beautiful.
Aritcle failed to mention that cheap Chinese imports have significant contribution on the inflation.

So what if Gov. collected tons of tax revenue but every thing from labor costs to materials are expensive?


January 20, 2006 03:25 AM

What about the effect of rising housing costs on property taxes? One would think that would easily offset the loss of sales tax revenues

Thank you for your interest. This blog is no longer active.



Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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