Using dynamic common correlated effects approach to analyze the role of sin taxes in short‐ and long‐term fiscal surplus across US states

Abstract

AbstractThis study empirically analyzes the role of sin taxes in short‐ and long‐run fiscal surplus and across US states via dynamic common correlated effects mean group (DCCEMG) and dynamic common correlated effects pooled mean group estimation (DCCEPMG) during a 36‐year period (1980–2015). Sin tax revenue increases long‐run fiscal surplus for all states, as shown in the log–log model; it also promotes short‐run state fiscal surplus for high‐income states, conservative state governments, and nonsouthern states. Compared to overall tax revenues that are elastic, sin taxes are inelastic revenue sources that promote states' long‐run fiscal surplus. Findings suggest that the effect of sin tax revenue on fiscal surplus varies based on state characteristics. This study contributes to the literature theoretically and practically. First, it marks an initial attempt to link sin taxes with states' fiscal conditions. Second, this study applies recent methodologies such as DCCEMG and DCCEPMG. Results offer practitioners valuable insight into the impacts of sin taxes on long‐run fiscal conditions.