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Is past prologue? Prospects for state and local sales tax bases

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General sales taxes provide substantial fractions of state and local revenues in the US. However, state and local sales tax bases have been eroding steadily during the past 50 years. Base erosion contributes to fiscal stress in the states; therefore, prospects for continued sales tax base erosion are important to state tax administrators, policymakers and public finance economists. This article offers a quantitative assessment of base erosion. We construct time series of a representative state sales tax base and its price index, and estimate a structural demand system for 'taxed' and 'untaxed' commodities. We use the estimates to forecast the sales tax base over coming years. Time-series forecasts and a weighted-average forecast are constructed, to reduce the likelihood of forecast error. The results suggest slow, but relentless, base erosion and possible recurring fiscal stress, in states where sales tax revenues make up sizable fractions of total tax revenues.

Document Type: Research Article


Affiliations: Belk College of Business, University of North Carolina at Charlotte, Charlotte, North Carolina 28223, USA

Publication date: July 1, 2010

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