Behavioural Patterns of Leaders versus Followers in Setting Local Sales Tax Policy

Jongmin Shon, Yilin Hou

Fiscal Studies: The Journal of Applied Public Economics, October 2024

Yilin Hou

Public Administration & International Affairs Department

Center for Policy Research

Moynihan Institute of Global Affairs

State & Local

Taxation

United States

Fiscal Studies: The Journal of Applied Public Economics

Yilin Hou

Sales tax has been a popular revenue source for local governments in 38 U.S. states. In this fiscal climate, both horizontal and vertical tax competition are frequently observed.

Local governments are concerned about adverse impacts, thereof, on their revenue as mobile shoppers react to tax rate changes by purchasing in lower-tax jurisdictions. So far, few studies have accounted for potential endogeneity in the behavioural patterns of leaders versus followers in setting local sales tax policy.

Using a 40-year panel dataset from Texas, this study identifies leader municipalities in changing sales tax rates and examines how municipalities asymmetrically respond to multi-tiered rate changes.

The findings depict a crowding-out story in vertical tax competition and reveal crowding-in effects in horizontal competition, with leader municipalities immune to both effects.