On The Relative Distortions of State Sales and Corporate Income Taxes

We use a 1985-2005 panel of state data to investigate the relative tax base elasticities of two major US state taxes—corporate income taxes and sales taxes—with respect to changes in their tax rates. We focus on these two taxes because they are essentially flat-rate taxes at the state level, making it relatively straightforward to construct estimates of their bases using aggregate collections and rate data. Building on recent work on the elasticity of taxable income for the federal personal and corporate income taxes, we estimate several regressions of alternative measures of state tax bases on state tax rates and other controls. We find that both tax bases are responsive to changes in tax rates, and that neither one is universally more elastic than the other. Our estimated elasticities are a bit larger than estimates from recent federal studies, due in large part to taxpayers’ ability to move taxable base across state lines without changing federal taxable income.