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

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.

How Do Balanced Budget Rules Impact Fiscal Performance Based On Revenue Structure?: Evidence From U.S. States

“…Previous studies have examined revenue elasticities in state income taxes and sales taxes (Crain 2003;Dye and Mcguire 1991;Felix 2008;Jordan, Yan, and Hooshmand 2017). Most of these studies have found that income taxes are more elastic, and thus more volatile than sale taxes (Bruce, Fox, and Tuttle 2006;Felix 2008). Bruce, Fox, and Tuttle (2006) demonstrated that the average elasticity of income taxes in the long run is two times more than that of sales taxes.…”

“…Most of these studies have found that income taxes are more elastic, and thus more volatile than sale taxes (Bruce, Fox, and Tuttle 2006;Felix 2008). Bruce, Fox, and Tuttle (2006) demonstrated that the average elasticity of income taxes in the long run is two times more than that of sales taxes. In the short run, asymmetric income elasticities tend to be exhibited in most states, but sales taxes are still less elastic.…”