Date of Award
Doctor of Philosophy
Matthew N. Murray
Donald Bruce, William F. Fox, LeAnn Luna
This essay empirically researches the setting of multiple tax rates by county governments in the presence of tax competition and agglomerations. Previous empirical evidence outside the tax arena suggests that firms earn rents in the presence of agglomerations from external economies of scale. As a result, governments might be able to extract a portion of these rents from businesses through higher tax rates. This paper empirically examines how local governments set sales and property tax rates, the two largest taxes paid by businesses at the state and local level, taking into account tax competition pressures and agglomerations. Using county jurisdictions, results are mixed regarding whether county governments set tax rates strategically, depending upon the specification of competitors. When found to set rates strategically, county governments behave as strategic complements. More specifically, a county government responds to an increase of one percentage point in its competitors’ sales (property) tax rate by increasing its rate by roughly 1.0 (0.5) percentage points. In addition, property tax rates are positively associated with certain measures of agglomerations, suggesting that governments might attempt to capture a portion of agglomeration rents through imposing higher property tax rates on businesses. These results suggest that agglomeration forces might affect the "race to the bottom" pressures.
This essay empirically investigates how a state that easily maintains and attracts residents conducts its tax policy while simultaneously accounting for the impact that state tax rates have on migration patterns. A state that easily maintains and attracts residents is thought to have some monopoly power that would allow the state to not be as concerned about the race to the bottom in tax rates. Specifically, a state with monopoly power will not feel the same pressure to lower tax rates to attract and maintain individuals. In addition, the state with monopoly power is not as concerned with the tax rates set in other states. State policymakers have long been concerned with the potential for their state’s tax policy to drive away residents and prevent non-residents from locating in the state. These fears potentially play a large role in the tax rate choices made by state policymakers. Results using a panel of state data from 1993-2004 confirm both hypotheses. Controlling for the simultaneous nature of the migration response and the tax rate decision, a positive relationship is found between the net in-migration of a state and the state personal income tax rate and the total state tax burden, indicating that a more attractive state is able to impose higher tax rates on its residents. Also a high net in-migration state responds differently to other states’ tax rates than a low net in-migration state.
Hill, Brian Christopher, "Essays on Tax Competition. " PhD diss., University of Tennessee, 2006.