State borders create a discontinuous tax treatment of retail sales. In a Nash game, local tax rates will be higher on the low state tax side of a border. Local taxes will decrease from the nearest high-tax border and increase from the low-tax border. Using driving time from state borders and all local sales tax rates, local tax rates on the low tax side of the border are 1.25 percentage points higher, reducing the differential in state tax rates by over three-quarters. A ten minute increase in driving time from the nearest high-tax state lowers a border town's local tax rate by 6 percent. (JEL H25, H71, H73, H77)
Agrawal, David R.
"The Tax Gradient: Spatial Aspects of Fiscal Competition."
American Economic Journal: Economic Policy,
Business Taxes and Subsidies including sales and value-added (VAT)
State and Local Taxation, Subsidies, and Revenue
State and Local Government; Intergovernmental Relations: Interjurisdictional Differentials and Their Effects
Intergovernmental Relations; Federalism; Secession