More on the Dangers of Inequitable Taxation

Last week, I opined on the problems with inequitable taxation: when two similarly-situated firms or individuals encounter different tax regimes, there are perverse incentives to alter economic behavior so as to lower one’s tax bill. This means individuals and firms make decisions based on the whims of politicians and lobbyists rather than on the values of consumers and investors. The result is inefficiency and waste.

A new paper by Daria Burnes, David Neumark, and Michelle White explores another problem with inequitable taxation: governments themselves can alter their behavior as a way to steer economic activity toward those industries that face higher rates of taxation. The authors note that local-option sales taxes “give local government officials an incentive to encourage retailing, since retailing generates more sales tax revenue than other land uses.”

How do they do this?

[T]hey can zone additional land for retail use, they can allow land zoned for retailing to be developed at higher density levels, and they can reduce the often‐formidable set of approvals and inspections that are required for construction or renovation. They can use all of the same policy instruments and practices in reverse to discourage other land uses.

They find that local officials in higher sales-tax jurisdictions do seem to concentrate on attracting large “big-box” stores and shopping centers. The effect is larger in the center of counties, where inter-county competition is weakest. Moreover, they find that high-tax jurisdictions tend to discourage manufacturing employment.