States have long used the sales tax as a revenue source. Since the 1970s states started granting localities the option of levying local sales taxes to enrich their revenue portfolio. Local sales taxes are often structured to reduce local property taxes; in most localities this strategy prevails in referendum. Since sales taxes are more elastic than property taxes, substituting away from the latter poses the threat of increased revenue volatility.

The authors employ a panel dataset of counties in the state of Georgia to examine the effects of local option sales tax on own-source revenue volatility. They decompose volatility into the long- and short-run, use a mean-variance approach in considering correct revenue portfolios across tax-instruments, and find that substitution towards sales tax amplifies revenue variability. The authors' study fills a niche in die revenue volatility literature; their results imply that sales taxes may have been overweighed in current revenue portfolios.