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Vertical externalities in tax setting: evidence from gasoline and cigarettes

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  • Besley, Timothy J.
  • Rosen, Harvey S.

Abstract

A common feature of federal systems is that tax bases are joint property. Consequently, state and federal tax setting decisions are interdependent. Our aim here is to put forward a rudimentary theoretical analysis of this phenomenon, and to use the theory as a framework for econometrically estimating the magnitude of the responses. We find that when the federal government increases taxes, there is a significant positive response of state taxes. For example, a 10-cent per gallon increase in the federal tax rate on gasoline leads to a 3.2-cent increase in the state tax rate.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 70 (1998)
Issue (Month): 3 (December)
Pages: 383-398

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Handle: RePEc:eee:pubeco:v:70:y:1998:i:3:p:383-398

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Web page: http://www.elsevier.com/locate/inca/505578

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  1. Hettich, Walter & Winer, Stanley L, 1988. "Economic and Political Foundations of Tax Structure," American Economic Review, American Economic Association, vol. 78(4), pages 701-12, September.
  2. Douglas Holtz-Eakin, 1988. "The Line Item Veto and Public Sector Budgets: Evidence from the States," NBER Working Papers 2531, National Bureau of Economic Research, Inc.
  3. Steven G. Craig & Robert P. Inman, 1986. "Education, Welfare, and the "New" Federalism: State Budgeting in a Federalist Public Economy," NBER Working Papers 1562, National Bureau of Economic Research, Inc.
  4. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  5. Holtz-Eakin, Douglas, 1988. "The line item veto and public sector budgets : Evidence from the states," Journal of Public Economics, Elsevier, vol. 36(3), pages 269-292, August.
  6. Timothy Besley & Anne Case, 1993. "Does Electoral Accountability Affect Economic Policy Choices? Evidence from Gubernatorial Term Limits," NBER Working Papers 4575, National Bureau of Economic Research, Inc.
  7. Robin W. Boadway & Michael Keen, 1994. "Efficiency and the Fiscal Gap in Federal Systems," Working Papers 915, Queen's University, Department of Economics.
  8. Daniel S. Hamermesh & David Scoones, 1996. "Multilevel "General Policy Equilibria": Evidence from the American Unemployment Insurance Tax Ceiling," NBER Working Papers 5578, National Bureau of Economic Research, Inc.
  9. Daniel R. Feenberg & Andrew W. Mitrusi & James M. Poterba, 1997. "Distributional Effects of Adopting a National Retail Sales Tax," NBER Chapters, in: Tax Policy and the Economy, Volume 11, pages 49-90 National Bureau of Economic Research, Inc.
  10. Oates, Wallace E. & Schwab, Robert M., 1988. "Economic competition among jurisdictions: efficiency enhancing or distortion inducing?," Journal of Public Economics, Elsevier, vol. 35(3), pages 333-354, April.
  11. Moulton, Brent R., 1986. "Random group effects and the precision of regression estimates," Journal of Econometrics, Elsevier, vol. 32(3), pages 385-397, August.
  12. Avinash Dixit, 1996. "Special-Interest Lobbying and Endogenous Commodity Taxation," Eastern Economic Journal, Eastern Economic Association, vol. 22(4), pages 375-388, Fall.
  13. James R. Hines & Richard H. Thaler, 1995. "The Flypaper Effect," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 217-226, Fall.
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