The Tax Gradient: Spatial Aspects of Fiscal Competition David R. Agrawal CESIFO WORKING PAPER NO. 5292 CATEGORY 1: PUBLIC FINANCE APRIL 2015 An electronic version of the paper may be downloaded • from the SSRN website: www.SSRN.com • from the RePEc website: www.RePEc.org • from the CESifo website: www.CESifoT -group.org/wpT ISSN 2364-1428 CESifo Working Paper No. 5292 The Tax Gradient: Spatial Aspects of Fiscal Competition Abstract State borders create a discontinuous tax treatment of retail sales. In a Nash game, local tax rates will be higher on the low-state-tax side of a border. Local taxes will decrease from the nearest high-tax border and increase from the low-tax border. Using driving time from state borders and all local sales tax rates, local tax rates on the low-tax side of the border are 1.25 percentage points higher, reducing the differential in state tax rates by over three-quarters. A ten minute increase in driving time from the nearest high-tax state lowers a border town’s local tax rate by 6%. JEL-Code: H200, H250, H730, H770, R510. Keywords: sales taxes, cross-border shopping, tax competition, fiscal federalism. David R. Agrawal University of Georgia Department of Economics 527 Brooks Hall USA – Athens, GA 30602
[email protected] The author is also an Affiliate Member of CESifo. I am especially grateful to Joel Slemrod, along with David Albouy, Robert Franzese, James R. Hines Jr. I also wish to thank Claudio Agostini, Johannes Becker, Leah Brooks, Charles Brown, Raj Chetty, Paul Courant, Lucas Davis, Michael Devereux, Dhammika Dharmapala, Reid Dorsey-Palmateer, Michael Gideon, Makoto Hasegawa, William Hoyt, Ravi Kanbur, Sebastian Kessing, Miles Kimball, Michael Lovenheim, Olga Malkova, Yulia Paramonova, Raphaël Parchet, Emmanuel Saez, Stephen Salant, Nicole Scholtz, Daniel Silverman, Jeffrey Smith, Caroline Weber, and David Wildasin, as well as various conference and seminar participants.