On the determinants of subnational tax progressivity in the US

An instrumental variables model of state and local tax incidence is estimated for the years 1977, 1985, and 1991. Tax exporting through deductibility of state and local taxes has a significant positive effect on tax progressivity. I find a negative neighbor effect, with more progressive states geographically contiguous with more regressive states. Party control by Republicans is associated with a more regressive tax structure. Expenditure and tax progressivity are not closely related to one another, with higher welfare spending financed by proportionally higher tax burdens throughout the income distribution. Greater inequality in pre-tax income distributions is offset by more progressive tax systems, but the degree of offset is small.