State Tax Rates Research Articles

The Economics of Managerial Taxes and Corporate Risk-Taking

We examine the relation between managers’ personal income tax rates and their corporate investment decisions. Using plausibly exogenous variation in federal and state tax rates, we find a positive relation between managers’ personal tax rates and their corporate risk-taking. Moreover — and consistent with our theoretical predictions — we find that this relation is stronger among firms with investment opportunities that have a relatively high rate of return per unit of risk, and stronger among CEOs who have a relatively low marginal disutility of risk. Importantly, our results are unique to senior managers’ tax rates — we do not find similar relations for middle-income tax rates. We also find that the tax-induced risk-taking relates to idiosyncratic rather than systematic risk, suggesting that it will not be priced by well-diversified shareholders. Collectively, our findings provide evidence that managers’ personal income taxes influence their corporate risk-taking.

The Option Value of Mortgage Interest Tax Deductibility

We offer a continuous-time contingent claims valuation framework to quantify the tax shield value of US mortgage interest deduction (MID) under uncertainty. We identify non-linear forms (both convex and concave regions) in the pay-off of MID, and discuss the implications for optimal mortgage purchase decisions. The model provides insights regarding the relationship between the effective MID and a set of underlying variables, including income level, house price, mortgage size, and state and local tax rates. In particular, we show how the tax shield value of a mortgage loan changes with key variables such as the life of the loan and the volatility of underlying processes. We apply the model to the case of optimal choice of adjustable versus fixed rate mortgages and prove that under a mean-preserving interest rate, an adjustable mortgage always offers a bigger tax saving. Our work demonstrates a novel aspect of dynamic analysis in the mortgage market.

What Drives Vertical Fiscal Interactions? Evidence from the 1980 Crude Oil Windfall Act

What drives vertical tax externalities? Previous studies focused on the standard common-pool problem. In this paper we study a new potential channel: complementarities between state and federal public goods. First, we illustrate its potential key role in determining the sign of the vertical reaction through a standard model of horizontal tax competition with vertical fiscal interactions. Second, we propose a novel strategy for identifying it, by considering an empirical design that confines the common-pool channel to specific locations. We implement this design through a quasi-natural experiment: the 1980 U.S. Crude Oil Windfall Act, which increased federal tax collections from sale of crude oil, thereby affecting the tax base of oil rich states specifically. This latter feature enables attributing the vertical fiscal reactions of the remaining states to the complementarity channel. Following this strategy, we decompose the vertical tax externalities arising from this federal tax change, and find that: (i) state and federal public goods are, on average, complementary, with complementarity being most apparent in transportation-related expenditures; (ii) the complementarity channel takes a considerable share in the overall vertical fiscal reaction, approximately 60% in the majority of our estimates; (iii) both the complementarity and common-pool effects increase state tax rates; (iv) complementarity (common-pool) affects state corporate (property) tax rates most strongly.

Has a High Value Added Tax Harmed the European Economy

The Value Added Tax (VAT) is widely used throughout Europe and is analogous to state and local sales taxes in the United States of America (U.S.) in that both are taxes on consumption. However, Europe's VAT rates are much higher than U.S. sales tax rates. The standard VAT rate ranges from 20% in Austria to 27% in Hungary. In contrast, U.S. state and local sales tax rates range from 0% in three states to 9.45% in Tennessee. Additionally, U.S. taxpayers can take a federal income tax deduction for sales taxes paid; thereby reducing their overall federal income tax bills. In part, the relatively low U.S. sales tax contributes to the difference in recent economic performance between the U.S. and Europe. Over the last year, Real Gross Domestic Product (RGDP) has increased by 2.4% in the United States compared with 1.4% in the Euro Area. The U.S. civilian unemployment rate is 5.0% compared with 10.2% in the Euro area.This paper examines whether European countries have been harmed by their high VAT rates. I collect revenue and expenditure data for 19 European countries, 17 of which are members of the European Union. For each country, I determine the effect of the VAT on GDP, on the unemployment rate, and on social welfare.The paper refers to the optimal tax theory, which defines an optimal tax regime as one in which social welfare is maximized. I introduce two additional criteria: GDP maximization and unemployment rate minimization. I compare the existing European tax regime to the current U.S. tax regime, and estimate the optimal VAT tax rate for 19 European countries.

ARE CONSUMPTION TAXES PREFERABLE TO INCOME TAXES FOR PREVENTING MACROECONOMIC INSTABILITY?

This paper examines the local determinacy implications of using consumption taxes and income taxes to finance a balanced budget fiscal policy for a variety of popular monetary policy rules. It is shown using a New Keynesian framework that the severity of the indeterminacy problem that arises under each tax system depends not only on the specification of the interest-rate feedback rule, but also on the magnitude of the steady state tax rate, the steady state government debt–output ratio, and the degree of price stickiness. Significant differences in the determinacy criteria across the two tax systems are found to exist. The robustness of the results is assessed by extending the baseline model to include capital accumulation and the taxation of bond interest income. From a policy perspective, our results suggest that future shifts toward indirect taxation could have nontrivial implications for the setting of monetary policy under balanced budget rules, in particular the ability of the Taylor principle to achieve determinacy.

The Effects of the Cigarette Excise Tax on State Smoking Rates, Healthcare Costs, and Beyond

During fiscal policy debates, increases in income and property incite noticeable public protest, while parallel increases in sin taxes rarely receive an equal amount of attention. But the manipulation of these may produce important costs and benefits for states. The excise tax on cigarettes is a particularly interesting case as its benefits depend on its indirect ability to decrease healthcare costs though reductions in smoking rates. This study tests whether a higher state tax rate decreases cigarette consumption, and thus, lowers tobacco-related healthcare costs. To examine this question, fixed effects multiple regression models are employed, using panel data from the Centers for Disease Control and Prevention (CDC) from 1996-2010 for all states and controlling for anti-tobacco program funding, population, and economic conditions. The final results show that significant predictive relationships exist between measures of cigarette consumption as related to price, yet these relationships only hold in predicting adult smoking rates (negative relationship), cessation rates (positive relationship), and pack sales per capita (negative relationship). Tax increases do not affect adult daily cigarette consumption rates in a significant way. Similarly, state funding for tobacco-control programs has little effect on consumption behavior. Hence, increases in cigarette may be one of the main factors acting upon quitting behavior among adults, while not affecting the number of cigarettes a smoker consumes. The policy conclusions of these results – while hesitant – promote higher cigarette as to curb smoking rates and indirectly ameliorate healthcare burdens.

Heterogeneous Vertical Tax Externalities, Capital Mobility, and the Fiscal Advantage of Natural Resources

How do state tax rates respond to federal tax shocks? This paper presents a novel mechanism of heterogeneous vertical tax externalities across levels of fiscal advantage, showing that tax increases can be expansionary -- even without their reinvestment. States rich in natural resources have a fiscal advantage in the inter-state competition over production factors which allows them to respond better to increases in federal taxes and, consequently, attract capital from other parts of the nation. We add heterogeneity in fiscal advantage levels to an otherwise standard model of vertical tax externalities and horizontal tax competition. The model shows that, irrespective of federal redistribution, the contractionary effect of a federal tax increase can be overturned in resource-abundant states, through an increase in their tax base. Using the case of the U.S., and narrative-based measured federal tax shocks a-la Romer and Romer (2010), we provide empirical evidence for the various aspects of this mechanism. Specifically, our lower-bound estimates indicate that, controlling for federal transfers, a 1% increase in the GDP share of federal taxes at the beginning of a year increases the growth rate of the per capita tax base by approximately 16% in high fiscal advantage states at the end of it.

SPECIAL‐INTEREST SPILLOVERS AND TOBACCO TAXATION

AbstractThis study explores the effects tobacco special interest has had on cigarette tax rates. Using a spatial econometric model to control for tax competition and the endogeneity present in state tax rates, this study finds that tobacco special interest has played a significant role in influencing state cigarette tax rates. Pounds of tobacco grown in a state and tobacco industry campaign contributions are associated with lower cigarette tax rates. The empirical results show that the magnitude of the special‐interest effect can be two to five times as large when the spatial spillover effects are included. (JEL C23, H71, H73)

The Tax Gradient: Spatial Aspects of Fiscal Competition

State borders create a discontinuous tax treatment of retail sales. In a Nash game, local tax rates will be higher on the low state tax side of a border. Local taxes will decrease from the nearest high-tax border and increase from the low-tax border. Using driving time from state borders and all local sales tax rates, local tax rates on the lowtax side of the border are 1.25 percentage points higher, reducing the differential in state tax rates by over three-quarters. A ten minute increase in driving time from the nearest high-tax state lowers a border town's local tax rate by 6 percent. (JEL H25, H71, H73, H77)

State and Local Sales Taxes and Business Activity in the United States

There has been an increasing reliance on sales taxation in both the states and counties in the United States. In this paper, we are examining the relationship between state and local sales taxation and business activity in the U.S. by utilizing county-level data for the period 2002-2011. We have found significant negative association between the state and county combined sales tax rate and annual payroll of businesses particularly in the manufacturing sector. There is also evidence of spatial dependence particularly in the payroll response of businesses within the contiguous region. While we found no significant relationship with employment, there is also statistically significant negative association with retail establishments and small establishments with less than 10 employees. It is possible that businesses respond to a sales tax rate increase first, or more directly, by reducing payroll rather than employment. While the economic significance of these results, however, is not found to be overwhelmingly strong, policymakers should still pay attention particularly to how manufacturing businesses respond to sales tax rate tax changes in the form of changes in payroll, and the responses from the small retail establishments.

Relative Prices and Substitution Across Wage, Welfare, and Disability Income

In this paper I exploit the fact that the social and economic reforms over the past two decades differentially affected the opportunity costs of non-participation in work, welfare, and disability programs for single mothers across different birth-year and education cohorts. This cohort variation in after-tax wages and transfer benefits is used to identify own- and cross-price elasticities of demand for and substitution across wage, welfare, and disability income over 1979 to 2001 in the Current Population Survey. To estimate these key parameters I model household preferences with a conditional Almost Ideal Demand System that admits corner solutions, nonseparability, endogenous wages and incomes, and latent heterogeneity via cohort and state fixed effects. I match individual and family-level data in the CPS both with family-specific federal, state, and payroll tax rates, and with state-specific and time-varying benefit levels and effective tax rates in the AFDC and SSI programs. Using a two-limit Tobit instrumental variables estimator I find strong evidence of sizable own and cross-programmatic substitution effects. For example, the estimated elasticities imply that between 1979 and 1999 the increase in the generosity of SSI relative to AFDC accounts for about 40 percent of the average growth in SSI, while the increase in real wages accounts for about one-half of the average decline in AFDC shares over the past two decades. Simulations suggest that changes in relative after-tax wages and transfer-program benefits over the past two decades lead to a substantial pull out of cash welfare and into expanded reliance on employment and disability as a means of financial support among single mothers.

Optimal U.S. State Alcohol Excise Taxes to Recover Government Cost of Excessive Consumption

Excessive alcohol consumption causes $223 billion in economic harm each year, including $94 billion in direct cost to federal, state, and local governments. The median for direct costs to states is $2.9 billion. For each U.S. state, revenues from specific alcohol excise taxes in 2006 and net revenues for control states were compared with recent state estimates of direct government cost of excessive consumption. Optimal state excise tax rates to internalize government costs were then calculated. Optimal state tax rates per ethanol gallon (gallon of pure alcohol) range from $77.70 to $276.28, with a mean of $185.95. Current state tax rates per ethanol gallon range from $0.24 to $26.05. The average per‐drink tax increase needed to achieve the optimal rate is $0.84, and the median is $0.85. New Hampshire has the lowest increase needed to achieve the optimal rate, at $0.35 per standard drink, and Oklahoma the highest at $1.25. Currently no state levies excise taxes at a rate that internalizes its direct government costs. Recommendations include levying tax rates volumetrically across beverage types and indexing tax rates to inflation. State policymakers may use the estimated optimal tax rates, along with assessment of state‐level factors contributing to excessive consumption, to increase the effectiveness of their states' alcohol policies.

State income tax reciprocity agreements and small businesses

Purpose – Small businesses play a vital role in job creation and economic growth, and previous studies have noted that higher state tax rates may reduce entrepreneurial activity, growth, and hiring. The paper aims to discuss this issue. Design/methodology/approach – In this paper, the authors use a 1989-2005 panel of state-level data to explore the effects of state income tax reciprocity agreements on several measures of small business activity. Since a reciprocity agreement exempts non-resident income from a state's personal income tax base, it has the potential to reduce barriers to entrepreneurial activity and lower tax compliance costs. Findings – The results indicate that reciprocity agreements appear to have reduced the tax-rate sensitivity of entrepreneurial activity, which may lead to more small business and entrepreneurial activity in states with more active agreements, other factors constant. This suggests that personal income tax reciprocity agreements may be a credible policy tool to expand small business activity. Originality/value – In this study, the paper sets out to determine if small business and entrepreneurial activity is greater in states that have reciprocity agreements and if such activity is dependent on the number of active agreements in place. Given recent nationwide efforts to ease compliance costs for business through other initiatives such as the Telecommuter Tax Fairness Act and the Streamlined Sales Tax Agreement, this study is the first to quantify how decreasing tax compliance and eliminating barriers to labor mobility affects small business activity. The results therefore have the potential to help shape debates in many states today.

SAVINGS INCENTIVES AND INVESTMENT MANAGEMENT FEES: A STUDY OF THE 529 COLLEGE SAVINGS PLAN MARKET

The government's province of encouraging educational attainment has been a priority for countless administrations in the United States at the federal and state levels. In the early 2000s. the Internal Revenue Code 529 was amended by the Economic Growth and Tax Relief Reconciliation Act to create an investment vehicle that would further encourage parental saving for college. Given exponentially rising college education costs, the appeal of these investment vehicles has been expanding such that now almost every state has multiple 529 plan options.(1) The increasing interest in these plans as investment options has spawned a corresponding interest in the fees associated with these plans and thus the analysis of the 529 plan market has become a salient issue for a considerable portion of the population. The 529 plans, especially those with deductibility of contributions from state income, are potentially of great benefit to consumers. Dynarski (2004b) finds that the advantages of 529 plans rise sharply with income. However, Dynarski (2004a) demonstrates that college savings plans can actually harm certain families on the margin of receiving financial aid when the joint treatment of college savings by the income tax code and financial aid system create tax rates that exceed 100% of college savings. Moreover, if most of the tax deductibility benefit is captured by the fund companies, prior to the convergence in the means and variances in plan fees, people in some states are no better off than they would have been by investing in housing equity or a nontax-advantaged account. The fees charged on the 529 plan accounts have been well above those charged by the underlying mutual funds that comprise the 529 plans (see Figure 1). While it is plausible that the average costs of 529 plans should be different from that of the mutual funds, it is not immediately obvious why there exists such variability of 529 fees across the states. For example. in 2006 Utah ran a 529 plan whose annual fees represented 0.39% of assets while North Carolina's plan fees were 1.32% of assets annually (Hurley 2006). Annual 529 plan fees range from 0.25% to 3.45% of assets charged annually (Hurley 2006). While the costs do differ depending on whether the 529 plan is broker sold or allows direct enrollment, even direct enroll plans exhibit considerable variation in fees across states.(2) [FIGURE 1 OMITTED] Variation in the fees of the underlying mutual funds is well documented (e.g., Dellva and Olson 1998; Khorana, Set-vacs, and Tufano 2007), so some of this variation appears to be consistent with mature equity markets. However, the changes in the tax rules of 2001. which provided additional investor benefits, should be serving to increase 529 plan competition and market efficiency.(3) Moreover, as information about the programs and their costs disseminates through the media, word of mouth, financial planners, and tax professionals, prices should further converge. Yet, from the data it is clear that competitive pressures have yet to eliminate large price differentials. _ In light of the fact that numerous investment management companies manage 529 plans for multiple states, the considerable heterogeneity with respect to 529 plan fees across states is particularly striking. Within the raw data, one can identify a number of instances in which a single investment management company sets significantly higher fees for one state over another. For example, in 2006, TIAA-CREF managed direct-sold 529 plans in both Michigan and Idaho. The average fee for the direct-sold 529 plan in Michigan was 60 basis points (bps), while the average fee for the direct-sold 529 plan in Idaho was 32 bps higher at 92 bps. Correspondingly, the fixed population average state tax rate on wage income in Michigan was 3.87%, while the fixed population average state tax rate on wage income in Idaho was 7.39%. There are several other 'unique elements that influence 529 plan fees and could account for the differences in fees across . …

The 50th Anniversary of the US Surgeon General's Report on Tobacco: What We've Accomplished and Where We Go From Here

January 11, 2014, marks the 50th anniversary of a significant milestone in our nation's public health. It was on this date in 1964 that US Surgeon General, Dr. Luther Terry, courageously released the first Surgeon General's Report on Smoking and Health.[1][1] This landmark report transformed the way

The effect of national revenues on sub-national revenues evidence from the U.S.

I present for the first time an empirical examination of the impact of total federal revenues on total sub-national proceeds. Prior theory recognizes that the effects of national revenues on sub-national revenue-raising are ambiguous. Earlier studies have focused on vertical relationships between particular tax bases, such as the impact of federal commodity taxes on state or provincial commodity tax rates. Using a panel of data from U.S. states over the recent decade, I find an economically and statistically significant degree of federal crowding in of state revenues. Also, employing a difference-in-differences design to study the impact of a 2004 change in the federal deductibility of state general sales taxes, I find modest evidence that deductibility increased state revenues in states more dependent on the sales tax. I note the potential implications of these results for fiscal federalism theory and legal controversies over federal conditional spending.

U.S. Alcohol Affordability and Real Tax Rates, 1950–2011

The affordability of alcoholic beverages, determined by the relationship of prices to incomes, may be an important factor in relation to heavy drinking, but little is known about how affordability has changed over time. To calculate real prices and affordability measures for alcoholic beverages in the U.S. over the period from 1950 to 2011. Affordability is calculated as the percentage of mean disposable income required to purchase 1 drink per day of the cheapest spirits, as well as popular brands of spirits, beer, and wine. Alternative income and price measures also are considered. Analyses were conducted in 2012. One drink per day of the cheapest brand of spirits required 0.29% of U.S. mean per capita disposable income in 2011 as compared to 1.02% in 1980, 2.24% in 1970, 3.61% in 1960, and 4.46% in 1950. One drink per day of a popular beer required 0.96% of income in 2010 compared to 4.87% in 1950, whereas a low-priced wine in 2011 required 0.36% of income compared to 1.05% in 1978. Reduced real federal and state tax rates were an important source of the declines in real prices. Alcoholic beverages sold for off-premises consumption are more affordable today than at any time in the past 60 years; dramatic increases in affordability occurred particularly in the 1960s and 1970s. Declines in real prices are a major component of this change. Increases in alcoholic beverage tax rates and/or implementing minimum prices, together with indexing these to inflation could be used to mitigate further declines in real prices.

The Effect of National Revenues on Sub-National Revenues: Evidence from the U.S.

I present for the first time an empirical examination of the impact of total federal revenues on total sub-national proceeds. Prior theory recognizes that the effects of national revenues on sub-national revenue-raising are ambiguous. Earlier studies have focused on vertical relationships between particular tax bases, such as the impact of federal commodity taxes on state or provincial commodity tax rates. Using a panel of data from U.S. states over the recent decade, I find an economically and statistically significant degree of federal crowding in of state revenues. I note the potential implications of these results for fiscal federalism theory and legal controversies over federal conditional spending.For copyright reasons, only the abstract of the full article is freely available online. This brief web appendix provides results for 2SLS robustness checks omitted from the published edition. Interested readers may contact the author for the full article.

The Tax Gradient: Do Local Sales Taxes Reduce Tax Differentials at State Borders?

Borders create a discontinuous tax treatment of retail sales. In a Nash game, equilibrium local tax rates will be higher on the low-tax side of a border. Taxes will decrease from the nearest high-tax border and increase from the nearest low-tax border. Using driving time from state borders and data on all local sales tax rates, local tax rates on the low-tax side of the border are 1.25 percentage points higher, reducing the differential in state tax rates by more than half. A one hour increase in time from the nearest high-tax border lowers local tax rates by 4%.

(UNCONTROLLED) AGGREGATE SHOCKS OR VERTICAL TAX INTERDEPENDENCE? EVIDENCE FROM GASOLINE AND CIGARETTES

Besley and Rosen (1998) were the first researchers to test empirically for the presence of vertical tax externalities, examining the case of unit taxes on gasoline and tobacco. However, they did not take into account the price differences across states that arise because high cost areas pay less in real terms than low cost areas, since federal unit sales taxes on cigarettes and gasoline do not differ across states. Consequently, we propose that vertical tax competition can be estimated by using a federal tax variable that is expressed in real terms and thus shows crosssectional variation across states. To estimate real prices we deflate all financial variables using the House Price Index (HPI), which is disaggregated by states. This empirical strategy enables us to disentangle the vertical interdependence between state and federal tax rates from aggregate shocks over time. We use U.S. data from 1975-2006 on gasoline and tobacco taxes, and find significant horizontal tax competition, but no vertical tax reactions. The results are robust to the period analyzed.