STABILITY

Idaho’s revenue structures should be designed to minimize year-to-year fluctuations and, to the extent that revenue system instability is present, it should be quantified and steps should be taken to offset it (reserve funds, timing of capital projects, etc).

One tried and true means of achieving greater revenue system stability is to rely on a diverse mix of revenue sources, and not place too much emphasis on any one source. In the context of state and local government revenue systems, this has been referred to as the “three-legged stool,” referring to income tax, sales tax, and property tax.

Regardless of how well a state balances its revenue structure, some degree of revenue instability is unavoidable. It then falls to structures outside the revenue system to address instability.

Reserve funds (sometimes called rainy-day funds) can act as shock absorbers, with funds flowing in to stock or replenish balances in the good times, and funds flowing out to supplement temporarily reduced revenues in the bad times. Expenditure policies can also play an important role in dealing with revenue system instability through the timing of discretionary spending such as new construction and, to a lesser degree, deferrable spending such as maintenance projects.

Regardless of the mechanism (reserves or spending policies), it is critical to understand the dimensions of revenue system instability, in terms of both magnitude and timing. As such, careful analysis of revenue sources and economic factors influencing revenue flows is crucial. to effectively deal with revenue system instability.