STRATEGIC FISCAL INTERDEPENDENCE: COUNTY AND MUNICIPAL ADOPTIONS OF LOCAL OPTION SALES TAXES

This study contributes to the tax competition literature by investigating the determinants of local option sales tax (LOST) adoptions using a model that simultaneously accounts for the presence of horizontal and vertical fiscal interactions. We use discrete time Cox Proportional Hazard regressions to study adoption patterns for county and municipal LOSTs in an environment where municipalities were authorized to implement LOSTs nearly two decades before counties. Controlling for factors measuring fiscal stress and the jurisdiction s ability to export its taxes, we demonstrate that both vertical and horizontal fiscal spillovers play an important role in characterizing the strategic interdependence of local governments when they tax a common retail sales base.