An examination of local option sales taxes
Afonso, Whitney Blair Scott
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This dissertation examines how the use of local option sales taxes affects county governments’ fiscal behavior. Local option sales taxes are becoming a popular form of revenue for many local governments; almost eleven thousand local governments have a local option sales tax in place (Tax Policy Center 2006). Therefore, it is important to understand how money generated by local option sales taxes is being used. I examine four different aspects of how local option sales taxes affect a government’s revenue and behavior using an interstate data set I collected from thirty-five states at the county level from 1983 to 2004. The use of local option sales taxes and how it relates to property taxes, own source revenue, stability of own source revenue, and when its revenue is earmarked for transportation are explored within my dissertation. Chapter 2 of my dissertation, entitled “LOST and Found: Local option sales taxes, property taxes, and own source revenue,” examines the effect of local option sales taxes on property tax burden and own source revenue per capita. My results suggest that local option sales taxes do reduce property tax burdens as well as increasing own source revenue, under certain circumstances. Chapter 3, entitled “Diversification Towards Stability? The Effect of Local Sales Taxes on Own Source Revenue,” examines the effect of local option sales taxes on the elasticity of own source revenue with regard to median household income. I find that the use of local option sales taxes does increase the elasticity of own source revenue, but the estimated effect is small in magnitude. Chapter 4, entitled “Local Sales Tax Earmarking and Transportation Outlay,” examines the use of tax earmarks on spending for the respective program. I find that local option sales taxes, when earmarked for transportation, do distort spending on transportation in the form of an increase.