International Tax and Public Finance

, Volume 17, Issue 3, pp 271–294

Consumption tax competition among governments: Evidence from the United States


  • Jan P. A. M. Jacobs
    • University of Groningen
    • CentER and Department of EconomicsTilburg University
    • Department of EconomicsUniversity of Groningen
  • Hendrik Vrijburg
    • Erasmus University Rotterdam

DOI: 10.1007/s10797-009-9118-z


The paper contributes to a small but growing literature that estimates tax reaction functions of governments competing with other governments. We analyze consumption tax competition between US states, employing a panel of state-level data for 1977–2003. More specifically, we study the impact of a state’s spatial characteristics (i.e., its size, geographic position, and border length) on the strategic interaction with its neighbors. For this purpose, we calculate for each state an average effective consumption tax rate, which covers both sales and excise taxes. In addition, we pay attention to dynamics by including lagged dependent variables in the tax reaction function. We find overwhelming evidence for strategic interaction among state governments, but only partial support for the effect of spatial characteristics on tax setting. Tax competition seems to have lessened in the 1990s compared to the early 1980s.


Tax competition Tax reaction function Consumption taxation Spatial lag

JEL Classification

H73 H87 H20 H70 C33

Copyright information

© The Author(s) 2009