ON ESTIMATING MARGINAL TAX RATES FOR U.S. STATES

This paper presents a procedure for generating state-specific time-varying estimates of marginal tax rates (MTRs). Most estimates of MTRs follow a procedure developed byKoesterandKormendi (1989) (K&K). Unfortunately, the time-invariant nature of the K&K estimates precludes their use as explanatory variables in panel data studies with fixed effects. Furthermore, the associated MTR estimates are not explicitly linked to statutory tax parameters. Our approach addresses both shortcomings. Using comprehensive tax policy data, we estimate state-specific, time-varying MTRs for all 50 states over the years 1977-2004. The inclusion of statutory tax variables has a significant impact on MTR estimates.