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  3. American Economic Journal: Economic Policy
  4. May 2015
  5. The Tax Gradient: Spatial Aspects of Fiscal Competition

The Tax Gradient: Spatial Aspects of Fiscal Competition

  • David R. Agrawal
American Economic Journal: Economic Policy
vol. 7, no. 2, May 2015
(pp. 1-29)
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Abstract

State borders create a discontinuous tax treatment of retail sales. In a Nash game, local tax rates will be higher on the low state tax side of a border. Local taxes will decrease from the nearest high-tax border and increase from the low-tax border. Using driving time from state borders and all local sales tax rates, local tax rates on the low tax side of the border are 1.25 percentage points higher, reducing the differential in state tax rates by over three-quarters. A ten minute increase in driving time from the nearest high-tax state lowers a border town's local tax rate by 6 percent. (JEL H25, H71, H73, H77)

Citation

Agrawal, David R. 2015. "The Tax Gradient: Spatial Aspects of Fiscal Competition." American Economic Journal: Economic Policy, 7 (2): 1-29. DOI: 10.1257/pol.20120360

Additional Materials

JEL Classification

  • H25 Business Taxes and Subsidies including sales and value-added (VAT)
  • H71 State and Local Taxation, Subsidies, and Revenue
  • H73 State and Local Government; Intergovernmental Relations: Interjurisdictional Differentials and Their Effects
  • H77 Intergovernmental Relations; Federalism; Secession
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