Investigating Sales Tax Revenue Competition Among Principal Cities and Their Neighboring Cities in Texas

ABSTRACT

While research has explored the economic importance of principal cities on regional economies, little is known about the short-run and long-run dynamic relationships between principal cities and their neighboring cities as it pertains to their sales tax revenue elasticities and the subsequent affect this has on horizontal tax competition. Using vector error correction models on data from six principal cities in Texas, the findings of this study suggest that the relationship between principal and neighboring cities is highly dynamic and unique for each principal city. The study recommends that local economic policies should reflect these unique relationships.

KEYWORDS:

• Sales tax revenue
• horizontal competition
• local government

Notes

1. The term “principal city” is used in favor of “central city” because the term “principal” replaced “central” for use in metropolitan region designations by the Office of Management and Budget in 2003. Neighboring cities is also preferred to suburban.

2. More information regarding the specific delineation requirements can be found in the following brief https://www.whitehouse.gov/sites/default/files/omb/assets/fedreg_2010/06282010_metro_standards-Complete.pdf.

3. Core urban areas can refer to a principle city or a census designated geographical area (Blair, 1995).

4. The strength of integration between an urban core and its surrounding jurisdictions is determined through commuting patterns (Blair, 1995).

5. While the study tested 20 miles and 50 miles–only 100-mile radius is reported. 20 miles presented a problem because some principal cities did not have neighbors within 20 miles of their centroid. For 50-miles radius, all statistically significant variables were similarly significant in the 100-mile radius models. Ultimately, a 100-mile radius was employed to ensure the broadest range of “neighboring cities.”