Vertical externalities in tax setting: Evidence from gasoline and cigarettes

Timothy J. Besley, Harvey S. Rosen

Research output: Contribution to journalArticlepeer-review

110 Scopus citations


A common feature of federal systems is that tax bases are joint property. Consequently, state and federal tax setting decisions are interdependent. Our aim here is to put forward a rudimentary theoretical analysis of this phenomenon, and to use the theory as a framework for econometrically estimating the magnitude of the responses. We find that when the federal government increases taxes, there is a significant positive response of state taxes. For example, a 10-cent per gallon increase in the federal tax rate on gasoline leads to a 3.2-cent increase in the state tax rate.

Original languageEnglish (US)
Pages (from-to)383-398
Number of pages16
JournalJournal of Public Economics
Issue number3
StatePublished - Dec 1 1998

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics


  • Cigarette taxes
  • Gasoline taxes
  • H23
  • H72
  • H73


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