Lost Stability? Consumption Taxes and the Cyclical Volatility of State and Local Revenues

Abstract

Some state and local governments continue to consider moving from income and property taxes, respectively, towards consumption taxes. Since the mid-1970s Georgia's local governments have had the option to substitute sales taxes for a portion of property tax receipts; the adoption of local option sales taxes (LOST) has since been widespread. This paper examines the effects of LOST on the long- and short-run volatility of local own-source revenues: Is adopting the local option sales taxes increasing or decreasing the volatility of own-source revenues? Using a large panel dataset of county governments in the state of Georgia across two most recent economic cycles, we find that LOST adds to the variability of own-source revenues, confirming that consumption taxes are less stable than property taxes they displace. This finding contributes to literature and bears direct implications to current policy debates.

Keywords: state and local, sales taxes, revenue, volatility

JEL Classification: H71, H72