OxCARRE Seminar: Federal Tax Shocks and State Fiscal Capacity: The Case of Natural Resources

Today, OxCARRE's Ohad Raveh presents his paper, joint with Fidel Perez-Sebastian [fae.ua.es] and Yaniv Reingewertz [weebly.com] on

Federal Tax Shocks and State Fiscal Capacity: The Case of Natural Resources

abstract:

How do states respond to federal fiscal shocks? In this paper we present a new mechanism of vertical fiscal externalities, by investigating the heterogeneous effects of federal fiscal shocks. While federal tax changes are equal across states, their effects are not. We exploit the variation in states' fiscal capacity, observed through the case of natural resources, to examine these heterogeneous effects. Consistent with previous studies, we find that increases in federal tax rates are contractionary for the average state, yet are mitigated, or even reversed in those with high fiscal capacity. We offer a theory of inter-regional competition that rationalizes this finding: states with high fiscal capacity make a relatively smaller increase in tax rates in response to a federal tax hike, triggering capital movement from low to high fiscal capacity states which, in turn, creates an expansionary (contractionary) effect in the latter (remaining) states. We provide evidence for this mechanism by examining narrative-based federal tax shocks, and various state-level characteristics, in the U.S. economy.

Draft not yet available

Edit: The abstract was for a different paper, here [oxcarre.ox.ac.uk]