TAX STRUCTURE AND THE LOCATION OF ECONOMIC ACTIVITY ALONG STATE BORDERS

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Abstract
This paper documents research on the effect that differential tax structures have in distorting the location of retail sales and employment along state borders. Increases in the state and local sales tax rate are found to reduce the level of retail activity on that side of the state border for two of the three moderately sized metropolitan areas which are studied. Employment and sales exhibited approximately the same responsiveness to tax rate changes. State income taxes are found to have minor influences on the location of retail activity and increases in selective sales tax rates generally create zero or very small effects on overall retail activity. The results indicate that consumers are more likely to change their consumption behavior in response to increases in the easily observable general sales tax than in other taxes that may indirectly raise business costs.

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