Local fiscal competition: An application to sales taxation with multiple federations

David R. Agrawal

Research output: Contribution to journalArticlepeer-review

21 Scopus citations


Local sales tax rates influence the location of retail activity. This paper develops a theory and empirical identification strategy for studying sales tax competition with "multiple federations," as exemplified by multiple counties each containing several cities. In addition to strategic interactions with nearby cities and a city's own county, city tax rates are influenced by the tax rates of neighboring counties. Cities react heterogeneously to own-county sales tax rates depending on distance to the county border. Using data on the driving time to county borders and a comprehensive cross-section of local sales tax rates, I exploit variation in proximity to county borders to identify vertical fiscal competition. Cities located near county borders react more intensely to their county's tax rate in comparison to towns at the interior. An increase in the neighboring county tax rate raises city tax rates in nearby counties.

Original languageEnglish
Pages (from-to)122-138
Number of pages17
JournalJournal of Urban Economics
StatePublished - Jan 1 2016

Bibliographical note

Publisher Copyright:
© 2015 Elsevier Inc.


  • Commodity taxation
  • Fiscal federalism
  • Local taxes
  • Tax competition

ASJC Scopus subject areas

  • Economics and Econometrics
  • Urban Studies


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