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Subnational government tax revenue capacity and effort convergence: New evidence from sequential unit root tests

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  • Mahdavi, Saeid
  • Westerlund, Joakim

Abstract

Convergence in revenue capacity and effort around rising trends help more subnational governments assume their devolved functions. We examine the extent of such convergence by estimating the proportion of all pairwise convergent gaps in a panel of 48 combined state-local governments (SLGs) over the period 1981–2013 using a novel methodology. We found no evidence of convergence in tax revenue capacity or tax effort. However, about half of the revenue effort gaps were convergent when revenue was more broadly defined. At a given revenue capacity level, SLGs significantly varied with respect to the revenue effort and incidence of its convergence. Our results caution against inferring convergence as a sample wide phenomenon based on conventional tests, reveal a potential challenge to devolution in the absence of redistribution of federal grants, and are consistent with desire for fiscal diversity.

Suggested Citation

  • Mahdavi, Saeid & Westerlund, Joakim, 2018. "Subnational government tax revenue capacity and effort convergence: New evidence from sequential unit root tests," Economic Modelling, Elsevier, vol. 73(C), pages 174-183.
    • Handle: RePEc:eee:ecmode:v:73:y:2018:i:c:p:174-183
    DOI: 10.1016/j.econmod.2018.03.016
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    2. Andrew R. Duggan & Douglas A. Carr & Wenli Yan, 2022. "Conditional impacts of political and fiscal factors on state environmental budgets," Public Budgeting & Finance, Wiley Blackwell, vol. 42(2), pages 127-147, June.

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    More about this item

    Keywords

    State and local governments; Convergence; Sequential unit root test;
    All these keywords.

    JEL classification:

    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

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