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

53 Pages Posted: 13 Aug 2011 Last revised: 22 Sep 2013

See all articles by David R. Agrawal

David R. Agrawal

University of Kentucky - James W. Martin School of Public Policy and Administration; University of Kentucky - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2013

Abstract

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

Agrawal, David R., The Tax Gradient: Do Local Sales Taxes Reduce Tax Differentials at State Borders? (August 1, 2013). Available at SSRN: https://ssrn.com/abstract=1909035 or http://dx.doi.org/10.2139/ssrn.1909035

David R. Agrawal (Contact Author)

University of Kentucky - James W. Martin School of Public Policy and Administration ( email )

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University of Kentucky - Department of Economics ( email )

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