Does federal deductibility affect state and local revenue sources?

This paper examines whether the change in federal deductibility of state and local sales taxes initiated by the American Jobs Creation Act of 2004 affected the distribution of state and local level revenue sources. Using data from the 2000–2008 Census Bureau State Government Tax Collections Survey, Annual Surveys of State and Local Government Finances, and Censuses of Governments, we find that federal sales tax deductibility led states to increase sales tax revenue per capita, and decrease individual income and corporate tax revenue per capita and decrease property taxes as a share of total taxes. We do not, however, find any statistically significant impacts on tax sources at the local level.