Strategic Fiscal Interdependence: County and Municipal Adoptions of Local Option Sales Taxes

Abstract

This study contributes to the tax competition literature by investigating the determinants of local option sales tax (LOST) adoptions using a model that simultaneously accounts for the presence of horizontal and vertical fi scal interactions. We use discrete time Cox Proportional Hazard regressions to study adoption patterns for county and municipal LOSTs in an environment where municipalities were authorized to implement LOSTs nearly two decades before counties. Controlling for factors measuring fi scal stress and the jurisdiction's ability to export its taxes, we demonstrate that both vertical and horizontal fi scal spillovers play an important role in characterizing the strategic interdependence of local governments when they tax a common retail sales base.

Leaders, Followers, and Asymmetric Local Tax Policy Diffusion

“…This is reassuring as it indicates that the index itself is fairly robust to the factor loadings of any individual factor. 13 Readers interested in further discussion concerning LOST program adoption should see Burge and Piper (2012 This dissipation may have been more intense in the 1960s compared with now since information flows more freely. Accordingly, we construct First_in_region to equal one if the municipality adopted in the year LOST programs first appeared in their region, and zero otherwise.…”

“…Readers interested in further discussion concerning LOST program adoption should see Burge and Piper ().…”

Geografiscal federalism

“…Spry (2005), Ashworth et al (2006), Rincke (2006aRincke ( , 2006bRincke ( , 2007Rincke ( , 2009), Fiva andRattso (2007), Hall andRoss (2010), Sjoquist et al (2007) and Burge and Piper (2012) turn their attention to local governments' discrete, binary choices about the introduction of novel forms of taxation or public service organization, and investigate whether those choices are affected by neighboring authorities'…”

“…On the other hand, Sjoquist et al (2007) and Burge and Piper (2012) investigate the determinants of local option sales taxes adoption in Georgia and in Oklahoma respectively. They model option sales tax adoption with a duration approach, where the time to adoption is allowed to be influenced by neighboring counties' adoptions.…”

State LST Laws: A Comprehensive Analysis of the Laws Governing Local Sales Taxes

“…LSTs have become a critical source of revenue for local governments, in fact almost 10,000 local governments have a LST in place (Drenkard ). The growth in LSTs has been in recent decades and the research remains less developed than the property tax literature; however, there has been in‐depth analysis of LSTs in certain key areas such as: the relationship between property taxes and LSTs (Afonso , ; Jung ; Krmenec ; Zhao and Jung ), the timing of LST adoptions (Afonso ; Burge and Piper ; Luna, Bruce, and Hawkins ; Sjoquist et al ; Zhao ), the volatility of revenue portfolios once LSTs have become a more critical component (Afonso ; Hou and Seligman ), and the LST revenue raising capacity of local governments (Afonso ; Zhao and Hou ). A great deal of the research has been single‐state analyses, but consumers of this information would be wise to ask to what extent the results are driven by the specific legal framework of the respective state under study and how well the results translate to other states.…”