What Drives Tax Policy? Political, Institutional and Economic Determinants of State Tax Policy
We collect detailed data on U.S. state personal income, corporate, sales, cigarette, gasoline, and alcohol taxes over the past 70 years to shed light on the determinants of state tax policies. We provide a comprehensive summary of how tax policy has changed over time, within and across states. We then use permutation analysis, variance decomposition, and machine learning techniques to show that the timing and magnitude of tax changes are not driven by economic needs, state politics, institutional rules, neighbor competition, or demographics. Altogether, these factors explain less than 20% of observed tax variation.
No funding to disclose The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.