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Tax Base Elasticities: A Multi-State Analysis of Long-Run and Short-Run Dynamics

Donald Bruce (), William Fox and Markland Tuttle

Southern Economic Journal, 2006, vol. 73, issue 2, 315–341

Abstract: We examine the relative dynamic responses of state personal tax revenues and sales tax bases to changes in state personal income. Our econometric analysis, which includes separate analyses of long-run and short-run dynamics for each state, permits the estimation of asymmetric short-run responses depending upon the relationship between current and expected tax base growth. Results indicate that the average long-run elasticity for income taxes is more than double that for sales taxes. Most states have asymmetric short-run income elasticities, which are again greater for income taxes than for sales taxes. However, a joint analysis of long- and short-run dynamics reveals that neither tax is universally more volatile. After calculating state-specific income elasticities for both taxes, we employ cross-section regression techniques to explain the variation in elasticities across states. Several policy factors are found to be important, including elements of tax bases and rate structures.

JEL-codes: H2 H7 (search for similar items in EconPapers)
Date: 2006
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