LegislativetaxchangesAdynamicpaneldataestimation.docVIP

Legislative Tax Changes: A Dynamic Panel Data Estimation Olugbenga Ajilore University of Toledo April 19, 2005 Legislative Tax Changes: A Dynamic Panel Data Estimation Author: Olugbenga Ajilore Position: Assistant Professor Affiliation: University of Toledo Address: 2801 Bancroft St. Department of Economics Toledo, OH 43606-3390 Phone: (419) 530-2113 E-mail: gbenga.ajilore@utoledo.edu JEL classification: H71, C61, C23 Keywords: Legislative tax changes, dynamic panel data estimation Abstract/Description This paper uses dynamic panel data estimation methods to test several hypotheses about legislative tax changes at the state level. I test a variety of theories taken from the economic, political science, and political economy literatures. I find that the economic and political economy theories show stronger support in explaining tax changes than the political science theories. I. Introduction This paper uses dynamic panel data estimation methods to test several hypotheses about legislative tax changes. State fiscal policy has become more of an important issue of the last couple of years due to drastic changes in revenues and expenditures. The declines in the stock market and the events surrounding September 11th have caused unexpected changes in state revenues. With increases in state expenditures from increasing health care costs and unfunded mandates, states have been forced to make difficult financial decisions. This study will focus on the two largest tax instruments used by state legislators: the individual income tax and the general sales tax. In Virginia in 2004, legislators passed increases in the sales tax and the cigarette tax to help make up a $1 billion deficit. This is said to be the first major tax increase in Virginia since 1986. This example shows the importance of using dynamic analysis. The deficits appeared in 2001, but the tax change occurred three years later. The literature on legislated tax changes is a largely overlooked are