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What Drives Vertical Fiscal Interactions? Evidence from the 1980 Crude Oil Windfall Act

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  • Fidel Perez-Sebastian
  • Ohad Raveh

Abstract

In economies with multi-level governments, why would a change in the …scal rule of a gov-ernment in one level lead to a …scal response by a government in a di¤erent level? Previous explanations focus on the standard common-pool problem. In this paper we study a new potential channel: complementarities between the public goods supplied by the two governments. First, we illustrate its potential key role in determining the sign of the vertical reaction through a standard model of horizontal tax competition with vertical …scal interactions. Second, we propose a novel strategy for identifying it, by considering an empirical design that con…nes the common-pool channel to speci…c locations. We implement this design through a quasi-natural experiment: the 1980 U.S. Crude Oil Windfall Act, which increased federal tax collections from sale of crude oil, thereby a¤ecting the tax base of oil rich states speci…cally. This latter feature enables attributing the vertical …scal reactions of the remaining states to the complementarity channel. Following this strategy, via a di¤erence-in-di¤erences approach, we decompose the sources of the vertical …scal reactions arising from this federal tax change and …nd that those attributed to the novel channel: (i) point at complementarity between state and federal public goods; (ii) account for approximately 40% of the overall vertical …scal response; (iii) are manifested primarily via corporate taxation.

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  • Fidel Perez-Sebastian & Ohad Raveh, 2016. "What Drives Vertical Fiscal Interactions? Evidence from the 1980 Crude Oil Windfall Act," OxCarre Working Papers 183, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  • Handle: RePEc:oxf:oxcrwp:183
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    More about this item

    Keywords

    Federalism; vertical fiscal reactions; common-pool problem; complimentarities; natural resources;
    All these keywords.

    JEL classification:

    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development

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