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Local fiscal competition: An application to sales taxation with multiple federations

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  • Agrawal, David R.

Abstract

Local sales tax rates influence the location of retail activity. This paper develops a theory and empirical identification strategy for studying sales tax competition with “multiple federations,” as exemplified by multiple counties each containing several cities. In addition to strategic interactions with nearby cities and a city’s own county, city tax rates are influenced by the tax rates of neighboring counties. Cities react heterogeneously to own-county sales tax rates depending on distance to the county border. Using data on the driving time to county borders and a comprehensive cross-section of local sales tax rates, I exploit variation in proximity to county borders to identify vertical fiscal competition. Cities located near county borders react more intensely to their county’s tax rate in comparison to towns at the interior. An increase in the neighboring county tax rate raises city tax rates in nearby counties.

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  • Agrawal, David R., 2016. "Local fiscal competition: An application to sales taxation with multiple federations," Journal of Urban Economics, Elsevier, vol. 91(C), pages 122-138.
    • Handle: RePEc:eee:juecon:v:91:y:2016:i:c:p:122-138
    DOI: 10.1016/j.jue.2015.04.001
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    1. Rohlin, Shawn M. & Thompson, Jeffrey P., 2018. "Local sales taxes, employment, and tax competition," Regional Science and Urban Economics, Elsevier, vol. 70(C), pages 373-383.
    2. Blesse, Sebastian & Martin, Thorsten, 2015. "Let's stay in touch - evidence on the role of social learning in local tax interactions," ZEW Discussion Papers 15-081, ZEW - Leibniz Centre for European Economic Research.
    3. Ferraresi, Massimiliano, 2023. "JUE Insight: Immigrants, social transfers for education, and spatial interactions," Journal of Urban Economics, Elsevier, vol. 136(C).
    4. Melissa Gentry & Nadia Greenhalgh-Stanley & Shawn M. Rohlin & Jeffrey P. Thompson, 2020. "Dynamic Sales Tax Competition: Evidence from Panel Data at the Border," Working Papers 20-5, Federal Reserve Bank of Boston.
    5. Kevin Willardsen, 2021. "Measuring fiscal interactions in local federalism: Evidence from Florida," Papers in Regional Science, Wiley Blackwell, vol. 100(4), pages 891-923, August.
    6. Johannes Becker & Michael Kriebel, 2017. "Fiscal equalisation schemes under competition," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(5), pages 800-816, September.
    7. Yulong Chen & Kevin D. Duncan & Liyuan Ma & Peter F. Orazem, 2023. "How relative marginal tax rates affect establishment entry at state borders," Small Business Economics, Springer, vol. 60(3), pages 1081-1103, March.
    8. Agrawal, David R. & Trandel, Gregory A., 2019. "Dynamics of policy adoption with state dependence," Regional Science and Urban Economics, Elsevier, vol. 79(C).
    9. Jeffrey Clemens & Stan Veuger, 2023. "Intergovernmental Grants and Policy Competition: Concepts, Institutions, and Evidence," NBER Chapters, in: Policy Responses to Tax Competition, National Bureau of Economic Research, Inc.
    10. Sanz Córdoba, Patricia & Theilen, Bernd, 1965-, 2017. "Strategic Responses to International Tax Competition: Fiscal (De) Centralization versus Partial Tax Harmonization," Working Papers 2072/306513, Universitat Rovira i Virgili, Department of Economics.
    11. Johan Lundberg, 2021. "Horizontal interactions in local personal income taxes," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 67(1), pages 27-46, August.
    12. Burge Gregory S. & Rogers Cynthia L., 2018. "Do State Sales Taxes Crowd Out Local Option Sales Taxes?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 18(3), pages 1-9, July.
    13. Federico Revelli & Tsung-Sheng Tsai & Roberto Zotti, 2021. "Fiscal Externalities in Multilevel Tax Structures: Evidence from Concurrent Income Taxation," CESifo Working Paper Series 9276, CESifo.
    14. Yoon-Jung Choi, 2022. "Property tax interaction among overlapping local jurisdictions: quasi-experimental evidence from school bond referenda," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(3), pages 537-580, June.
    15. Reingewertz, Yaniv, 2018. "Corporate taxes and vertical tax externalities: Evidence from narrative federal tax shocks," Regional Science and Urban Economics, Elsevier, vol. 68(C), pages 84-97.
    16. Dechun Liu & Xinye Zheng & Yihua Yu, 2022. "Public Debt Competition in Local China: Evidence and Mechanism of Spatial Interactions," Regional Science Policy & Practice, Wiley Blackwell, vol. 14(S2), pages 91-105, November.
    17. Bo Zhao, 2021. "Opting in with the Joneses: What Affects the Timing of Municipal Adoption of a Local-option Meals Tax?," Working Papers 21-14, Federal Reserve Bank of Boston.
    18. Frank M. Fossen & Lukas Mergele & Nicolas Pardo, 2017. "Fueling fiscal interactions: commodity price shocks and local government spending in Colombia," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(4), pages 616-651, August.

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    Keywords

    Commodity taxation; Tax competition; Fiscal federalism; Local taxes;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • R50 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - General

    Statistics

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    Corrections

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