The sheriff of nottingham𡀙s favorite tax: How local option sales taxes exacerbate budgetary inequalities between local governments

Abstract

This paper tests the theory that local option sales taxes (LOST) work to the disadvantage of poorer localities, particularly rural areas, where many residents commute to shop and work. We also hypothesize that LOST systems hurt struggling communities more than they help prospering ones. The LOST system is examined using multiple years of data from North Carolina, a state whose tax structure favors such an analysis. The results indicate that LOST systems exacerbate inequality between local communities by actively moving revenue from poorer communities to more wealthy ones. We find evidence that LOST systems cost poorer counties a greater percentage of their total budgets than is gained by the wealthy counties that attract retail activity.