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Vertical Externalities in Tax Setting: Evidence from Gasoline and Cigarettes

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Author Info
Timothy J. Besley
Harvey S. Rosen

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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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6517.

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Date of creation: Mar 1999
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Handle: RePEc:nbr:nberwo:6517

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Find related papers by JEL classification:
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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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. [Downloadable!] (restricted)
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  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. [Downloadable!] (restricted)
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  7. Daniel R. Feenberg & Andrew W. Mitrusi & James M. Poterba, 1997. "Distributional Effects of Adopting a National Retail Sales Tax," NBER Working Papers 5885, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Robin Boadway & Michael Keen, 1994. "Efficiency and the Fiscal Gap in Federal Systems," Working Papers 915, Queen's University, Department of Economics.
  9. Besley, Timothy & Case, Anne, 1995. "Does Electoral Accountability Affect Economic Policy Choices? Evidence from Gubernatorial Term Limits," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 769-98, August. [Downloadable!] (restricted)
    Other versions:
  10. 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. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Goodspeed, Timothy J., 1999. "Tax competition and tax structure in open federal economies : evidence from OECD countries with implications for the European Union," ZEW Discussion Papers 99-39, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
    Other versions:
  2. Jean-Franois, RICHARD & Henry, TULKENS & Magali, Verdonck, 2005. "Tax interaction dynamics among Belgian municipalities, 1984-1997," Discussion Papers (ECON - Département des Sciences Economiques) 2005039, Université catholique de Louvain, Département des Sciences Economiques. [Downloadable!]
    Other versions:
  3. Fredriksson, Per & Mamun, Khawaja, 2009. "Gubernatorial Reputation and Vertical Tax Externalities: All Smoke, No Fire?," Working Papers 2009002, Sacred Heart University, John F. Welch College of Business. [Downloadable!]
  4. Fredriksson, Per & Mamun, Khawaja, 2009. "Tobacco Politics and Electoral Accountability in the United States," Working Papers 2009003, Sacred Heart University, John F. Welch College of Business. [Downloadable!]
  5. Esteller-Moré, Álex & Solé-Ollé, Albert, 1999. "Vertical income tax externalities and fiscal interdependence : evidence from the US," ZEW Discussion Papers 99-28, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
    Other versions:
  6. Amihai Glazer & Stef Proost, 2007. "The Preferences of Voters Over Road Tolls and Road Capacity," Working Papers 060712, University of California-Irvine, Department of Economics. [Downloadable!]
  7. Rizzo, Leonzio, 2007. "Interaction between vertical and horizontal tax competition: evidence and some theory," MPRA Paper 8632, University Library of Munich, Germany, revised 2008. [Downloadable!]
  8. Marius BRÜLHART & Mario JAMETTI, 2004. "Vertical Versus Horizontal Tax Externalities: An Empirical Test," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 04.11, Université de Lausanne, Faculté des HEC, DEEP. [Downloadable!]
    Other versions:
  9. Matthieu Leprince & Sonia Paty & Emmanuelle Reulier, 2005. "Choix d'imposition et interactions spatiales entre collectivités locales. Un test sur les départements français," Recherches économiques de Louvain, De Boeck Université, vol. 71(1), pages 67-93. [Downloadable!]
  10. Rizzo, Leonzio, 2005. "Interaction between Vertical and Horizontal tax Competition: Theory and Evidence," MPRA Paper 5334, University Library of Munich, Germany. [Downloadable!]
  11. Diego Martínez-López, 2005. "Fiscal federalism and public inputs provision - vertical externalities matter," Working Paper Series 484, European Central Bank. [Downloadable!]
  12. William Hoyt, 2005. "The Assignment and Division of the Tax Base in a System of Hierarchical Governments," Working Papers 2005-07, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
  13. Leonzio Rizzo, 2008. "Local government responsiveness to federal transfers: theory and evidence," International Tax and Public Finance, Springer, vol. 15(3), pages 316-337, June. [Downloadable!] (restricted)
    Other versions:
  14. Devereux, Michael & Lockwood, Ben & Redoano, Michela, 2004. "Horizontal And Vertical Indirect Tax Competition : Theory And Some Evidence From The Usa," The Warwick Economics Research Paper Series (TWERPS) 704, University of Warwick, Department of Economics. [Downloadable!]
    Other versions:
  15. Lisa Schweitzer & Brian Taylor, 2008. "Just pricing: the distributional effects of congestion pricing and sales taxes," Transportation, Springer, vol. 35(6), pages 797-812, November. [Downloadable!] (restricted)
  16. Matthieu LEPRINCE & Sonia PATY & Emmanuelle REULIER, 2005. "Choix dÕimposition et interactions spatiales entre collectivitŽs locales : un test sur les dŽpartements franais," Discussion Papers (REL - Recherches Economiques de Louvain) 2005013, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES). [Downloadable!]
  17. Per G. Fredriksson & John A. List & Daniel L. Millimet, 2003. "Chasing the Smokestack: Strategic Policymaking With Multiple Instruments," NBER Working Papers 9801, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  18. Esteban Klor, 2002. "A Positive Model of Overlapping Income Taxation in a Federation of States," Wallis Working Papers WP32, University of Rochester - Wallis Institute of Political Economy. [Downloadable!]
  19. Michael J. Keen & Christos Kotsogiannis, 2002. "Does Federalism Lead to Excessively High Taxes?," American Economic Review, American Economic Association, vol. 92(1), pages 363-370, March. [Downloadable!]
  20. Revelli Federico, 2002. "Reaction or interaction? Spatial process identification in multi-tiered government structures," Department of Economics Working Papers 200202, University of Turin. [Downloadable!]
    Other versions:
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