State and local tax competition in a spatial model with sales taxes and residential property taxes

This paper presents a theoretical model with a uniformly populated line that is divided into local jurisdictions (and/or states). If one level of government imposes sates and residential property taxes, and if the spatial extent of each taxing jurisdiction is positive and finite, then (in Nash equilibrium) the sales tax rate is less than residential property tax rate, housing consumption is suboptimal, and the public good is underprovided in each jurisdiction. If a very large state (or country) is divided into local jurisdictions, and if both levels of government choose tax rates endogenously, then under some assumptions there is an efficient outcome. (C) 2012 Elsevier Inc. All rights reserved.