Sales Tax Competition among State-Local Governments: Evidence from the US Counties

This article estimates tax reaction function of local governments competing with other governments to provide the insight for tax policy decision makers. Employing a panel of county-level data in all the states from 1970 to 2006, this article analyzes sales tax competition between county governments. In addition to a static model, this article pays more attention to dynamics in tax reaction function estimated by general methods of moments containing lagged dependent variables in the reaction function. Focusing on county governments, this article finds evidence for strategic interaction, an interaction that has positive effects on the setting of tax rates in a county.