Competition over the Tax Base in the State Sales Tax

The sales tax shows wide variation across states. Rates differ, some states allow local options, and the base can vary dramatically. Consumer items like food are often afforded preferential treatment, and business purchases like manufacturing machinery are exempt in some states. There is no research that explores these and other sales tax base choices. This article provides an empirical examination of sales tax base choice on the part of states using a political economy framework and tools of spatial econometrics. The analysis accommodates tax competition among states, using a variety of alternative definitions of “competitors.” The authors find little evidence that consumer exemptions are linked to needy segments of the population, while equipment exemptions are more common in states with large industrial sectors. The results also show that the nature of the interstate tax competition process differs for different elements of the base and that nongeographic competition can be especially important.