The Relative Ability to Tax Coal in the Western States

Abstract

Over the past decade, state governments have begun to acknowledge an implicit relationship between states in the tax-setting process. The recent taxation literature suggests that differences in tax burdens do affect economic decisions and that states do compete with each other when designing tax policy. Moreover, there has been a growing interest in the theoretical models of strategic interactions between regions as they compete for tax revenues. Natural source-laden states enjoy an advantage in the collection of own-source revenues. Reserves of coal, oil, copper, or other natural resources with a national market provide states with an opportunity to exploit their advantage through the imposition of severance taxes. The purpose of this study is to examine the relationship between the western states in their relative power to tax the extraction of coal. In section II of this paper we examine earlier work on the taxation of western coal. Section III contains the details of the coal model we use. In section IV we determine the composition of the western coal market and the strategic tax-setting behavior of the state governments involved. In section V we discuss our empirical results. 17 refs., 2 tabs.