Tax Exporting, Federal Deductibility, and State Tax Structure

This paper studies the interaction between the federal and state tax systems during the 1980s and in particular considers how the Tax Reform Act of 1986 affected state tax structure. Using a panel data set on state governments over a nine year period, I estimate tax share equations for six categories of taxes. I find that the state personal income tax is sensitive to changes in its tax price but find a much smaller sensitivity to changes in tax prices for the general sales tax. I then consider various reasons for why the sales tax does not exhibit a sensitivity to changes in tax price and consider the implications of these results for policy makers.