Have State Tax Interdependencies Changed Over Time?

Abstract

The literature investigating strategic tax competition among U.S. state has shown significant variation in terms of the magnitude, and even the sign, of tax competition effects. One dimension upon which variation in results may occur is the period of analysis. It is plausible that tax competiveness may change over time as the economic environment changes, and as such, an investigation into dynamic strategic tax responsiveness may be of value. We systematically examine whether, and to what extent, tax interdependencies have changed over time using a series of spatial regression models using a panel of state-level data covering U.S. states from 1978 through 2006. Results consistently provide evidence that the degree to which states change personal income tax (PIT) rates in response to changes in neighboring states diminished over much of the period of analysis. Results provide some evidence that responsiveness in setting sales tax rates also changed.