A problem of volatile tax revenue is discussed in “The Price of Taxing the Rich” in the March 26 issue of The Wall Street Journal.
Many states (and to some extent the federal government too) have tax revenues that are heavily dependent on taxing the rich. For example, nearly half the income tax revenue in California comes from the top 1% of earners.
The problem is that people at the top also have the most volatile incomes, and thus the most volatile taxes:
In New York, the top 1% of taxpayers contribute more to the state's year-to-year tax swings than all the other taxpayers combined …
The solution to this is pretty simple: smooth spending more than tax revenue.
Rainy-day funds, which can help bail out governments during recessions, have also run into political opposition or proven too small to save state budgets. A study by the Center on Budget and Policy Priorities found that effective rainy day funds should be 15% of state operating expenditures—more than three times the state average before the crisis.