Consumption tax competition among governments: Evidence from the United States

• Published in: International tax and public finance Vol. 17; no. 3; pp. 271 - 294
• Main Authors: Jacobs, Jan P. A. M., Ligthart, Jenny E., Vrijburg, Hendrik
• Format: Journal Article
• Language: English
• Published: Boston Springer US 01.06.2010; Springer; Springer Nature B.V
• Series: International Tax and Public Finance
• Subjects: Business Taxation/Tax Law; C33; Competition; Consumption; Consumption taxation; Consumption taxes; Economics; Economics and Finance; Estimation; Excise taxes; Fiscal policy; Government; H20; H70; H73; H87; Mathematical analysis; Panel data; Public Finance; Retail sales; Sales taxes; Spatial analysis; Spatial lag; State government; Strategic planning; Studies; Tax competition; Tax rates; Tax reaction function; Tax revenues; U.S.A; Use taxes; United States > US; H70; Spatial lag; C33; H73; H87; Tax competition; H20; Tax reaction function; Consumption taxation
• ISSN: 0927-5940; 1573-6970
• DOI: 10.1007/s10797-009-9118-z

The paper contributes to a small but growing literature that estimates tax reaction functions of governments competing with other governments. We analyze consumption tax competition between US states, employing a panel of state-level data for 1977–2003. More specifically, we study the impact of a state’s spatial characteristics (i.e., its size, geographic position, and border length) on the strategic interaction with its neighbors. For this purpose, we calculate for each state an average effective consumption tax rate, which covers both sales and excise taxes. In addition, we pay attention to dynamics by including lagged dependent variables in the tax reaction function. We find overwhelming evidence for strategic interaction among state governments, but only partial support for the effect of spatial characteristics on tax setting. Tax competition seems to have lessened in the 1990s compared to the early 1980s.