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Tax Base Elasticities: A Multi-State Analysis of Long-Run and Short-Run Dynamics

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  • Donald Bruce

    ()
    (Center for Business and Economic Research, University of Tennessee)

  • William F. Fox

    ()
    (Center for Business and Economic Research, University of Tennessee)

  • M.H. Tuttle

    ()
    (Department of Economics and International Business, Sam Houston State University)

Abstract

We examine the relative dynamic responses of state personal tax revenues and sales tax bases to changes in state personal income. Our econometric analysis, which includes separate analyses of long-run and short-run dynamics for each state, permits the estimation of asymmetric short-run responses depending upon the relationship between current and expected tax base growth. Results indicate that the average long-run elasticity for income taxes is more than double that for sales taxes. Most states have asymmetric short-run income elasticities, which are again greater for income taxes than for sales taxes. However, a joint analysis of long- and short-run dynamics reveals that neither tax is universally more volatile. After calculating state-specific income elasticities for both taxes, we employ cross-section regression techniques to explain the variation in elasticities across states. Several policy factors are found to be important, including elements of tax bases and rate structures.

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Bibliographic Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 73 (2006)
Issue (Month): 2 (October)
Pages: 315–341

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Handle: RePEc:sej:ancoec:v:73:2:y:2006:p:315-341

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Cited by:
  1. Upender, M., 2008. "Degree Of Tax Buoyancy In India : An Empirical Study," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 5(2).
  2. Fricke, Hans & Süssmuth, Bernd, 2013. "Growth and volatility of tax revenues in Latin America," Working Papers 124, University of Leipzig, Faculty of Economics and Management Science.
  3. Jordi Caballé & Judith Panadés, 2011. "Tax Evasion, Technology Shocks, and the Cyclicality of Government Revenues," Working Papers 546, Barcelona Graduate School of Economics.
  4. Fricke, Hans & Süssmuth, Bernd, 2014. "Growth and Volatility of Tax Revenues in Latin America," World Development, Elsevier, vol. 54(C), pages 114-138.
  5. Richard H. Mattoon, 2004. "The state of the state and local government sector: fiscal issues in the Seventh District," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 2-17.
  6. Leon Bettendorf & Duncan van Limbergen, 2013. "The stability of tax elasticities in The Netherlands," CPB Discussion Paper 256, CPB Netherlands Bureau for Economic Policy Analysis.
  7. Elizabeth C. McNichol, 2010. "Commentary on "state tax revenue growth and volatility"," Regional Economic Development, Federal Reserve Bank of St. Louis, issue Oct, pages 59-64.
  8. Koshy Mathai & Andrew Swiston & Martin Mühleisen, 2007. "U.S. Revenue Surprises," IMF Working Papers 07/143, International Monetary Fund.
  9. Brückner, Markus, 2012. "An instrumental variables approach to estimating tax revenue elasticities: Evidence from Sub-Saharan Africa," Journal of Development Economics, Elsevier, vol. 98(2), pages 220-227.
  10. Michael Brei, 2013. "Offshore financial centers in the Caribbean: An overview," EconomiX Working Papers 2013-40, University of Paris West - Nanterre la Défense, EconomiX.
  11. Guido Wolswijk, 2009. "The short- and long-run tax revenue response to changes in tax bases," Economics Bulletin, AccessEcon, vol. 29(3), pages 1960-1970.
  12. Rick Mattoon, 2003. "Creating a national state rainy day fund: a modest proposal to improve future state fiscal performance," Working Paper Series WP-03-20, Federal Reserve Bank of Chicago.
  13. Timothy J. Bartik & George A. Erickcek, 2012. "Simulating the Effects of Michigan's MEGA Tax Credit Program on Job Creation and Fiscal Benefits," Upjohn Working Papers and Journal Articles 12-185, W.E. Upjohn Institute for Employment Research.
  14. Vincent Belinga & Dora Benedek & Ruud A. de Mooij & John Norregaard, 2014. "Tax Buoyancy in OECD Countries," IMF Working Papers 14/110, International Monetary Fund.
  15. R. Alison Felix, 2008. "The growth and volatility of state tax revenue sources in the Tenth District," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 63-88.
  16. Zhao, Bo & Coyne, David, 2013. "Walking a tightrope: are U. S. state and local governments on a fiscally sustainable path?," Working Papers 13-18, Federal Reserve Bank of Boston.
  17. Richard Deitz & Andrew F. Haughwout & Charles Steindel, 2010. "The recession's impact on the state budgets of New York and New Jersey," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 16(Jun/Jul).

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