Local option sales taxes and consumer spending patterns: Fiscal interdependence under multi-tiered local taxation

Twenty US states currently allow both county and municipal governments to impose sales taxes on purchases within their jurisdictions. This study investigates the complex multi-jurisdiction and multi-tier dimensions of local option sales taxes (LOSTs) in this setting. We estimate own-rate and cross-tier elasticities using data from 1993 to 2006 for Oklahoma municipalities and counties. Using a variety of panel data techniques including first differenced and random trends models, we show both are significant determinants of consumer spending patterns. Additionally, accounting for localized tax rate differentials reveals important nuances in the interpretation of cross-tier and own-rate elasticities. Our results suggest that municipal LOST revenues can be significantly affected by the rate setting decisions of parent counties as well as nearby regional retail centers. Therefore, the ability of municipal governments to control LOST revenues by varying their own LOST rate is affected by both vertical and horizontal fiscal spillovers. Understanding the nature of fiscal interdependence in this setting is important for the 34 US states that authorize some form of LOSTs as well as any considering their implementation.