The Tax Gradient: Do Local Sales Taxes Reduce Tax Differentials at State Borders?
53 Pages Posted: 13 Aug 2011 Last revised: 22 Sep 2013
Date Written: August 1, 2013
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%.
Keywords: Sales Taxation, Cross-border Shopping, Tax Competition, Local Taxes
JEL Classification: H21, H25, H73, H77, R12
Suggested Citation: Suggested Citation