LOST Stability? Consumption Taxes and the Cyclical Variability of State and Local Revenues

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gs_wps_Hou_Seligman_2010-002.pdf (567.1 KB)

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2010-09

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John Glenn School of Public Affairs

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States and localities continue moving towards consumption taxes. Georgia’s local governments displace a portion of their property tax receipts with revenue from the Local Option Sales Tax. This paper employs a panel dataset of Georgia counties across two economic cycles to examine the effects of consumption taxes on the long- and short-run volatility of local own-source revenues. We offer a mean-variance approach for considering correct revenue portfolio shares across tax-instruments. Holding revenues constant we find that permanent substitution towards a consumption tax amplifies variability of own-source revenues, implying that consumption taxes are overweighed in current revenue portfolios.

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state government, local government, own-source revenue, volatility, cyclical variability

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http://hdl.handle.net/1811/46881

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Working Papers Series (John Glenn College of Public Affairs)