The paper studies a regional environmental tax reform in a federal state. A region unilaterally improves the environmental quality by increasing its energy taxes. The regional government recycles the excess tax revenues by lowering either pre-existing distorting labor or capital taxes. This regional tax reform causes a vertical tax externality in the federal budget. We show how the nature of this externality depends on the environmental goal, the tax-recycling scenario, the initial local and federal tax shares, and the relative importance of the reforming region in the federal state. Simulations illustrate the effects for Belgium and US.
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Find related papers by JEL classification: H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
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