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State Tax Rankings: What Do They And Don’T They Tell Us?

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  • Anderson, John E.

Abstract

This study examines some of the prominent state tax rankings that have been developed in recent years, with a focus on the indices that are specifically attempting to measure state and local taxes in some way. Each index is reviewed to determine what aspect of state tax systems are being measured and how. The article begins with a theoretical framework that informs the question of what tax rates should be measured, depending on the purpose of the intended index. It is important to distinguish, for example, whether tax rates are measured as average tax rates, marginal tax rates, statutory tax rates, or effective marginal tax rates. After analysis of the way several prototypical indices are constructed, this study also considers whether the indices actually have economic explanatory power. The Tax Foundation’s State Business Tax Climate Index is used as an explanatory variable in several estimated state GDP growth models. While the index has a statistically significant effect on state GDP growth in simple models, once more state-specific factors are included in the growth models the significance of the index disappears. Research suggestions are made for techniques that can be used to more effectively assess the explanatory power of state tax rankings. The conclusion of the analysis is that caution on the use and interpretation of such indices is warranted.

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Bibliographic Info

Article provided by National Tax Association in its journal National Tax Journal.

Volume (Year): 65 (2012)
Issue (Month): 4 (December)
Pages: 985-1010

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Handle: RePEc:ntj:journl:v:65:y:2012:i:4:p:985-1010

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  1. Goolsbee, Austan, 2000. "The Importance of Measurement Error in the Cost of Capital," National Tax Journal, National Tax Association, National Tax Association, vol. 53(n. 2), pages 215-28, June.
  2. Thomas A. Garrett & Russell M. Rhine, 2011. "Economic freedom and employment growth in U.S. states," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Jan, pages 1-18.
  3. Helms, L Jay, 1985. "The Effect of State and Local Taxes on Economic Growth: A Time Series-Cross Section Approach," The Review of Economics and Statistics, MIT Press, vol. 67(4), pages 574-82, November.
  4. Austan Goolsbee, 2000. "The Importance of Measurement Error in the Cost of Capital," NBER Working Papers 7558, National Bureau of Economic Research, Inc.
  5. Jed Kolko & David Neumark & Marisol Cuellar Mejia, 2011. "What Do Business Climate Indexes Teach Us About State Policy and Economic Growth?," NBER Working Papers 16968, National Bureau of Economic Research, Inc.
  6. John E. Anderson & Robert W. Wassmer, 2000. "Bidding for Business: The Efficacy of Local Economic Development Incentives in a Metropolitan Area," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, W.E. Upjohn Institute for Employment Research, number bb.
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Cited by:
  1. Richard M. Bird, 2014. "Reflections on Measuring Urban Fiscal Health," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper1425, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.

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