The effects of political factors, industrial mix and tax competition on state tax revenue composition: Theoretical and empirical evidence

A comparison of state tax sources reflects different tax systems including differing mixes and levels of taxes, different tax bases and varying rate structures among the fifty states. Five states do not impose general sales taxes while six collect more than 50% of tax revenue from this source; nine states do not impose broad-based personal income tax while four collect more than 50% of tax revenue from this source. These patterns suggest several questions including: Why do states rely on some taxes more than others, how do states decide on the mix and magnitude of tax revenues and what factors influence tax structure decisions?;The purpose of this research is to examine the factors determining the composition of tax revenues across the fifty states between 1979--1999. The focus is on the three major tax sources: general sales, personal and corporate income taxes. The research is an empirical investigation of the tax shares and how policy preferences, economic shifts, continuous voter support and competitive pressures influence them across the states. The analysis is designed to consider how three broad influences affect marginal decisions on the use of these tax instruments. First, policymakers consider the preferences of interest groups, (income earners, retailers and businesses) in choosing between the major tax instruments. Second, they consider the state's industrial mix and how revenues will respond to the level of economic activity located within their jurisdictions. Finally, policymakers consider tax competition, made easier by cross-border shopping and the rise of electronic commerce, when setting their tax structure.;The study takes an initial step toward filling a lack of comprehensive characterization of the tax revenue composition of the fifty states. The empirical results uncover unique responses of tax portfolios to economic, political and tax competition developments. These three aspects of tax revenue portfolios affect the balance of state tax revenue and produce widespread state budget shortfalls. State policymakers can utilize the findings of this study when analyzing their tax revenue compositions. The current study can serve in finding a better solution to states' budget problems. The provided results could help evaluate the reliance on particular tax source and develop new tactics that enable state policymakers to meet their budget needs.