Local Sales Taxes and Spending Patterns in U.S. County Governments

Abstract

The fiscal effects of local (option) sales taxes (LOSTs) have remained an open question. This paper assembles a county-level dataset of all the U.S. states from 1970 to 2006, and employs two empirical methods to obtain more convincing and generalizable results. The main goal of this study is to consider the different purposes of LOSTs for county governments and examine the effects of each purpose on local spending patterns. The empirical results confirm that LOSTs help counties expand their total revenue, ownsource revenue, and total expenditure, as well as their operating and capital spending. Further findings reveal that the effects of general-purpose LOSTs (GLOSTs) differ from those of special- purpose LOSTs (SPLOSTs) on the spending patterns in county governments. SPLOSTs expand a county’s capital spending and reduce its operating spending, while GLOSTs are more helpful for expanding a county’s operating spending. The empirical findings imply that local policy-makers should consider whether it should specify a purpose before they make a decision on LOST adoption.