Abstract
The fiscal effects of local (option) sales taxes (LOSTs) have remained an open question. This paper assembles a county-level dataset of all the U.S. states from 1970 to 2006, and employs two empirical methods to obtain more convincing and generalizable results. The main goal of this study is to consider the different purposes of LOSTs for county governments and examine the effects of each purpose on local spending patterns. The empirical results confirm that LOSTs help counties expand their total revenue, ownsource revenue, and total expenditure, as well as their operating and capital spending. Further findings reveal that the effects of general-purpose LOSTs (GLOSTs) differ from those of special- purpose LOSTs (SPLOSTs) on the spending patterns in county governments. SPLOSTs expand a county’s capital spending and reduce its operating spending, while GLOSTs are more helpful for expanding a county’s operating spending. The empirical findings imply that local policy-makers should consider whether it should specify a purpose before they make a decision on LOST adoption.
Highlights
Local governments in the U.S have relied heavily on property tax revenues; tax revolts began to restrict their taxation in the late 1970s
We have empirically examined the fiscal effects of local (option) sales taxes (LOSTs) in county governments by employing two different empirical approaches to yield convincing and generalizable results
We found that LOSTs enable county governments to increase their total revenues and own-source revenues, as well as to expand total expenditures and operational spending
Summary
Local governments in the U.S have relied heavily on property tax revenues; tax revolts began to restrict their taxation in the late 1970s. A thorough review of state statutes regarding LOSTs reveals two types of LOSTs: (1) general-purpose LOSTs (herea er, GLOSTs) that aim to raise revenue capacity and reduce property tax burdens, and (2) special-purpose LOSTs (herea er, SPLOSTs) that are earmarked to finance a specific capital project. Is study focuses on these two different purposes of LOSTs, and hypothesizes that (1) LOSTs have changed the spending behavior of governments by providing an additional revenue source, while (2) an earmark in SPLOSTs have different effects on the behavior from GLOSTs. To test the hypotheses, we constructed a national panel dataset covering the period of 1970-2006 and applied two empirical approaches. Our results confirm that LOSTs expand local revenue capacity, so LOST-levying counties can expand both total expenditures and capital and operational spending. The results reveal that GLOSTs and SPLOSTs have different effects on the spending pa erns of counties
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