Tax Interdependence in the U.S. States

Abstract

State governments finance their expenditures with multiple tax instruments, so when collec-tions from one source decline, they are typically compensated by greater revenues from other sources. This paper addresses the important question of the extent to which personal and cor-porate income taxes are used to compensate for sales tax ‡uctuations within the U.S. states. The results show that one percent increase in the sales tax rate is associated with a half and a third percent decrease in the personal and corporate income tax rates respectively. In terms of tax revenues per capita, the results show that a one percent increase in the sales tax revenue per capita is associated with a 3 percent and a 0.9 percent decrease in the corporate and personal income tax revenue per capita respectively. On average then, an exogenous reduction of $4.5 in the sales tax revenue per capita is compensated, ceteris paribus, with an increase of either$3.4 in the collections per capita from corporate taxes or $3.6 in the ones from personal income taxes.