A common feature of federal systems is that tax bases are joint property. Consequently, state and federal tax setting decisions are interdependent. Our aim here is to put forward a rudimentary theoretical analysis of this phenomenon, and to use the theory as a framework for econometrically estimating the magnitude of the responses. We find that when the federal government increases taxes, there is a significant positive response of state taxes. For example, a 10-cent per gallon increase in the federal tax rate on gasoline leads to a 3.5-cent increase in the state tax rate.
Authors
![Tim Besley](/sites/default/files/styles/square_desktop/public/2022-07/Tim%20Besley.jpg?itok=3EW68rGC)
Research Associate London School of Economics
Timothy is a Research Associate at the IFS and a Professor of Economics and Political Science at the London School of Economics and Political Science.
![Person graphic](/sites/default/files/styles/square_desktop/public/2022-06/IFS-person-graphic.png?itok=hWCtTSrz)
Harvey S. Rosen
Working Paper details
- DOI
- 10.1920/wp.ifs.1997.9723
- Publisher
- IFS
Suggested citation
Besley, T and Rosen, H. (1997). Vertical externalities in tax settings: evidence from gasoline and cigarettes. London: IFS. Available at: https://ifs.org.uk/publications/vertical-externalities-tax-settings-evidence-gasoline-and-cigarettes (accessed: 30 June 2024).
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