David Gamage (Missouri-Columbia; Google Scholar) & Darien Shanske (UC-Davis; Google Scholar), Winter Is Coming: What States Should Do Now, Part I, 116 Tax Notes State 297 (May 5, 2025):
This Article addresses the unprecedented fiscal challenges facing state governments as federal policy shifts threaten to create a perfect storm of revenue losses and increased service demands. As states confront potential federal cuts to essential services like Medicaid, reduced tax enforcement capacity, and possible tariff-driven economic disruption, we argue that piecemeal responses will prove insufficient.
We propose a seven-step framework for state fiscal resilience: (1) pausing automatic conformity to federal tax changes to preserve revenue bases; (2) enhancing state tax enforcement capacity by hiring federal personnel as the IRS sheds expertise; (3) maintaining and expanding taxpayer service innovations like direct filing programs; (4) protecting research and educational infrastructure as critical long-term investments; (5) implementing progressive tax reforms to counter regressive federal changes; (6) modernizing consumption tax structures by expanding sales tax bases to services and digital products; and (7) rethinking fundamental fiscal architecture, including wealth taxation and borrowing constraints.
The Article emphasizes that these strategies must work in concert rather than isolation. For example, increasing tax rates without enhanced enforcement capacity may prove ineffective, while protecting revenue bases requires both legislative and administrative approaches. Similarly, states that fail to maintain their research and educational infrastructure may face long-term economic disadvantages that undermine future revenue potential.
Our analysis demonstrates why states cannot simply wait for federal policy reversals or rely on traditional fiscal adjustment mechanisms. Instead, proactive and coordinated state action is essential to maintain vital public services and economic competitiveness during this period of federal retrenchment. This comprehensive approach offers states a pathway to navigate fiscal challenges while preserving their capacity to serve residents and compete economically.
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2 responses to “Gamage & Shanske: What States Should Do Now, Part I”
I would argue the opposite. States need more conformity with the federal tax code, not less. Any deviation can result in years of administrative headaches. Take bonus depreciation. Many states add it back in year one, but allow subtractions over multiple years. Multiply this annual differential by millions of returns, and you have the potential for tax leakage, not more revenue.
If a state needs more money, it should do the transparent thing and raise its tax rates.
I would argue the opposite. States need more conformity with the federal tax code, not less. Any deviation can result in years of administrative headaches. Take bonus depreciation. Many states add it back in year one, but allow subtractions over multiple years. Multiply this annual differential by millions of returns, and you have the potential for tax leakage, not more revenue.
If a state needs more money, it should do the transparent thing and raise its tax rates.