Dynamic Sales Tax Competition: Evidence from Panel Data at the Border
Interest in attracting firms, the jobs they generate, and the tax revenues associated with this economic activity can foster tax competition in which local governments adjust their tax rates in response to rate changes in nearby jurisdictions (horizontal tax competition) and to changes in their own state (vertical tax competition). Thus tax competition can potentially affect not only where consumers shop and firms locate but also funding for local public services.
This paper examines both vertical and horizontal tax competition over time by studying the strategic response of county sales taxation to own-state sales taxes and to the combined state and county taxes of cross-border neighboring municipalities. Using county and state sales tax data from 2003 through 2009, the authors employ both static and dynamic panel analysis as well as an instrumental variables approach in combination with a border analysis.