Testing the determinants of state business tax burdens

Political interest theory is used to derive predictions about cross-sectional and time-series variations in state tax burdens. We examine this variation in the context of interest group theory, positing that in states where business interest group strength is relatively significant, business tax rates are lower. The predictions are tested using total state business tax rates for the period 1973–1986. Employing theory similar to that used by Carpenter (1991), we find that state business tax rates are a function of political supply and demand factors. Such factors include legislative size, inter-party political competition, gubernatorial electoral competition, and business resources. Additionally, states' total business tax rates were found to increase after the ‘tax revolution’ (Gold 1984, p. 9) of 1978 when individual tax rates decreased.