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Voter Ideology, Tax Exporting, and State and Local Tax Structure

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Voter Ideology, Tax Exporting, and State and Local Tax Structure University of Kentucky UKnowledge Theses and Dissertations--Public Policy and Martin School of Public Policy and Administration Administration 2012 Voter Ideology, Tax Exporting, and State and Local Tax Structure John M. Foster University of Kentucky, [email protected] Right click to open a feedback form in a new tab to let us know how this document benefits ou.y Recommended Citation Foster, John M., "Voter Ideology, Tax Exporting, and State and Local Tax Structure" (2012). Theses and Dissertations--Public Policy and Administration. 2. https://uknowledge.uky.edu/msppa_etds/2 This Doctoral Dissertation is brought to you for free and open access by the Martin School of Public Policy and Administration at UKnowledge. It has been accepted for inclusion in Theses and Dissertations--Public Policy and Administration by an authorized administrator of UKnowledge. For more information, please contact [email protected]. STUDENT AGREEMENT: I represent that my thesis or dissertation and abstract are my original work. Proper attribution has been given to all outside sources. I understand that I am solely responsible for obtaining any needed copyright permissions. I have obtained and attached hereto needed written permission statements(s) from the owner(s) of each third-party copyrighted matter to be included in my work, allowing electronic distribution (if such use is not permitted by the fair use doctrine). I hereby grant to The University of Kentucky and its agents the non-exclusive license to archive and make accessible my work in whole or in part in all forms of media, now or hereafter known. I agree that the document mentioned above may be made available immediately for worldwide access unless a preapproved embargo applies. I retain all other ownership rights to the copyright of my work. I also retain the right to use in future works (such as articles or books) all or part of my work. I understand that I am free to register the copyright to my work. REVIEW, APPROVAL AND ACCEPTANCE The document mentioned above has been reviewed and accepted by the student’s advisor, on behalf of the advisory committee, and by the Director of Graduate Studies (DGS), on behalf of the program; we verify that this is the final, approved version of the student’s dissertation including all changes required by the advisory committee. The undersigned agree to abide by the statements above. John M. Foster, Student Dr. Eugenia Toma, Major Professor Dr. Edward Jennings, Director of Graduate Studies VOTER IDEOLOGY, TAX EXPORTING, AND STATE AND LOCAL TAX STRUCTURE ____________________________________ DISSERTATION ____________________________________ A dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in the Martin School of Public Policy and Administration at the University of Kentucky By John M. Foster Lexington, Kentucky Director: Dr. Eugenia Toma, Wendell H. Ford Professor of Public Policy Lexington, Kentucky Copyright © John M. Foster 2012 ABSTRACT OF DISSERTATION VOTER IDEOLOGY, TAX EXPORTING, AND STATE AND LOCAL TAX STRUCTURE State and local governments play an important role in financing and delivering public services in the United States. In 2008, state and local governments collected 57 percent of total federal, state, and local revenue (Urban Institute and Brookings Institution, Tax Policy Center, 2009). The decentralization of fiscal responsibility has enabled a high degree of variation in state and local tax structures to emerge. This dissertation presents two empirical studies that extend the positive literature on state and local tax policy. The extant literature contains evidence of a direct relationship between voter ideology and state and local tax progressivity. However, the measures of voter ideology that were used either did not capture differences in the intensity of voter liberalism across states, did not vary over time, or were beset with other limitations. This study uses the measure of average voter liberalism developed by Berry et al (1998). I find that average voter liberalism is significantly and positively-related to progressivity. However, the effect is small in magnitude. The ethnic congruence between the poor and the non-poor is positively-related to progressivity and the effects are economically significant. The degree of tension between ethnic groups, measured with an index of ethnic residential segregation, is significantly and inversely-related to progressivity. Both variables are statistically significant even with average voter liberalism held constant. It is possible that the ethnic demographic context reflects aspects of voters’ redistributive preferences that are not captured by measures of ideology. Researchers have found relationships between states’ tax exporting capacities and the tax structures they adopt. Chapter 4 is the first study to examine the relationship between state tax exporting capacities and the business sales taxes. I find that the effective sales tax rate that governments impose on business purchases is not significantly influenced by a state’s capacity to export business taxes. It is, however, significantly and positively affected by a state’s ability to export taxes on households through the deductibility of state and local taxes under the federal income tax. A decrease in this offset is predicted to lead to an increase in the effective business sales tax rate, ceteris paribus. KEYWORDS: State and local public finance; tax progressivity; ideology; sales tax; tax exporting John Foster Student’s Signature 7-24-2012 Date VOTER IDEOLOGY, TAX EXPORTING, AND STATE AND LOCAL TAX STRUCTURE By John M. Foster Dr. Eugenia Toma Director of Dissertation Dr. Edward Jennings Director of Graduate Studies 7-24-2012 ACKNOWLEDGEMENTS This dissertation would not have been possible without the generous input provided by many people. I am grateful for the opportunity to express to them my deepest thanks and appreciation. I am deeply indebted to Eugenia Toma, my advisor and chair. She has provided invaluable input on every aspect of this dissertation and has consistently gone the extra mile as a teacher and collaborator. I also owe a sincere thanks to J.S. Butler and Chris Bollinger for giving me a strong foundation in econometrics. Additionally, I would like to thank the other members of my committee, William Hoyt, David Wildasin, and Merl Hackbart for providing valuable input on this dissertation and for enhancing my understanding of public finance inside and outside of the classroom. I would also like to thank Richard Maurer for serving as my outside examiner. All errors contained herein remain my own. iii Table of Contents Acknowledgements ....................................................................................................... iii List of Tables ...................................................................................................................v Chapter 1: Introduction ................................................................................................1 Organization of the Dissertation ...................................................................................3 Chapter 2: Voter Ideology, Fiscal Federalism, and State and Local Tax Structure .........8 Introduction .................................................................................................................8 Theoretical Frameworks ..............................................................................................8 The Role of Ideology ................................................................................................. 14 Tax Exporting ............................................................................................................ 17 Tax Competition ........................................................................................................ 22 Implications for Research .......................................................................................... 26 Chapter 3: Voter Ideology, Ethnic Demographics, and State and Local Tax Progressivity 29 Conceptual Framework .............................................................................................. 30 Empirical Approach ................................................................................................... 35 Results ....................................................................................................................... 46 Discussion ................................................................................................................. 50 Chapter 4: Tax Exporting and the Business Share of Sales Tax Levies ....................... 57 Background ............................................................................................................... 59 Conceptual Framework .............................................................................................. 63 Empirical Implementation .......................................................................................... 64 Results ....................................................................................................................... 71 Policy Implications .................................................................................................... 73 Conclusion................................................................................................................. 75 Chapter 5: Summary, Conclusions, and Research Prospects ....................................... 81 Dissertation Summary ...............................................................................................
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