TY - JOUR AU - Besley, Timothy J AU - Rosen, Harvey S TI - Vertical Externalities in Tax Setting: Evidence from Gasoline and Cigarettes JF - National Bureau of Economic Research Working Paper Series VL - No. 6517 PY - 1999 Y2 - March 1999 DO - 10.3386/w6517 UR - http://www.nber.org/papers/w6517 L1 - http://www.nber.org/papers/w6517.pdf N1 - Author contact info: Timothy J. Besley Department of Economics London School of Economics Houghton Street London WC2A 2AE ENGLAND E-Mail: T.Besley@lse.ac.uk Harvey S. Rosen Department of Economics Simpson Building Princeton University Princeton, NJ 08544 Tel: 609/258-4022 Fax: 609/258-6419 E-Mail: HSR@princeton.edu AB - A common feature of federal systems is that tax bases are joint property. Consequently, state and federal tax setting decisions are interdependent. Our aim here is to put forward a rudimentary theoretical analysis of this phenomenon, and to use the theory as a framework for econometrically estimating the magnitude of the responses. We find that when the federal government increases taxes, there is a significant positive response of state taxes. For example, a 10-cent per gallon increase in the federal tax rate on gasoline leads to a 3.2-cent increase in the state tax rate. ER -