Strategic interjurisdictional behavior and the interaction over time of the mean and dispersion of average tax rates across states are analyzed in a vector autoregression model. Variance decompositions reveal that fiscal competition explains roughly one-third of the time variation of state and local taxes. Impulse response functions identify the type of fiscal competition and the characteristics of leaders and followers. Local tax dynamics agree with Wildasin's (1988) results on expenditure competition with significant short- and medium-run effects but insignificant long-run effects. State tax dynamics conform to tax export competition with significant effects occurring over a relatively short time.
JEL classification: H70, C32, C72
Key words: intergovernmental competition, state and local taxes, time series methods
The author is grateful for valuable comments and suggestions from Gerry Carlino, Ted Crone, Chris Mayer, D'Ann Petersen, Lori Taylor, Bill Testa, Dick Voith, Ping Wang, David Wildasin, and Mark Wynne, as well as from participants at the Federal Reserve's 1995 Regional System Meeting in Philadelphia and the 1996 Western Economics Association Meetings in San Francisco. The views expressed here are those of the author and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the author's responsibility.
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