One underlying premise of the move toward devolution is that states are more capable of successfully managing various tasks than the federal government because they are better able to adapt to the particular challenges within their borders. The resourcesavailable to states to carry out those duties, however, are also limited to their ability to raise revenues from their own residents. In this report, Harold A. Hovey explores the constraints that states face in collecting taxes and assesses which states are best and least prepared to finance any added responsibilities. Among the forces Hovey examines that affect state fiscal capacity: competitive pressures among states to keep taxes low, tax systems that may or may not collect revenue at the same ratethat incomes rise, the impact of local and national economic cycles, the economic resources within each state, and mismatches between revenues and needs.

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