Tax Interdependence in the U.S. States

Abstract

State governments finance their expenditures with multiple tax instruments, so when collections 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 corporate income taxes are used to compensate for sales tax fluctuations within the U.S. states. The results show that a one percent decrease in the sales tax revenue per capita is associated with a 3 percent or a 0.9 percent increase 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.Tax Mix, State Taxes,Instrumental Variables.