Optimal taxation and the stationarity of state tax rates

U.S. States, the Medicaid Program, and Tax Smoothing

“…This result supports the findings of Strazicich ( 1996Strazicich ( , 1997 and Dole (2000), who perform panel unit root tests on state tax rate series. Additionally, it is found that this rejection cannot be attributed to the stringency of balanced budget rules, which supports the finding in Bohn and Inman (1996) but runs counter to that in Dole (2000), Who finds that tax smoothing cannot be rejected for some subgroups of states operating under more flexible fiscal environments. A possible avenue for further research to reconcile these results might focus on the relationship between resource mobility, balanced budget rule stringency, and the extent…”

“…Interpreting the least stringent rules as nonbinding, the results imply that balanced budget rules are not the cause of the rejection of tax smoothing. This finding supports that of Bohn and Inman ( 1996), who regress a cross section of estimated mean reversion coefficients obtained from AR( 1) state tax rate regressions on the ACIR indices for each state and find no correlation, while it runs counter to Dole (2000), who finds that more flexible fiscal environments promote tax smoothing.…”

“…Strazicich ( 1996) performs a Levin-Lin (1992) panel unit root test and rejects that state tax rates are unit root processes. 3 Dole (2000) performs Im, Pesaran, and Shin ( 1997) unit root tests and cannot reject tax smoothing for those states required to balance smaller portions of their budgets. 4 This paper tests the tax smoothing theory by focusing on its implication that a change in permanent government spending should result in an equal sized change in the tax rate.…”