EFFECTS OF A FEDERAL VALUE-ADDED TAX ON STATE AND LOCAL GOVERNMENT BUDGETS

A longstanding concern of state and local governments is that a federal value-added tax (VAT) could severely limit their reliance on sales taxes. But a federal VAT could have even larger effects on revenues from other sources and on spending through changes in incomes, relative prices, and asset values. To provide the plausible range of budgetary effects, we examine both a narrow- and comprehensive-based PIT, with consumer prices fully adjusting and not changing, over both short- and long-run time horizons. We find that the plausible range of effects includes an improvement in the fiscal position of states and localities.