What Drives Tax Policy? Political, Institutional and Economic Determinants of State Tax Policy

Abstract

We collect detailed data on U.S. state personal income, corporate, sales, cigarette, gasoline, and alcohol taxes over the past 70 years to shed light on the determinants of state tax policies. We provide a comprehensive summary of how tax rates have changed over time, within and across states. We then use permutation analysis, variance decomposition, and machine learning techniques to show that the timing and magnitude of tax rate changes are not driven by economic needs, state politics, institutional rules, neighbor competition, or demographics. Altogether, these factors explain less than 20% of observed tax variation.

Keywords: state taxes, fiscal federalism, income tax, corporate tax, sales tax, cigarette tax, alcohol tax, gasoline tax, machine learning

JEL Classification: D72, H20, H71, H73, H77