dc.description.abstract |
Considering the significant discrepancies among states in revenue generation mechanisms, it is logical that there will be variations in how certain states respond to economic shocks that directly impact their tax base. Some states rely heavily on a high property tax, while others have high personal income tax rates. Additionally, some states attempt to distribute the burden more evenly between the two aforementioned components and sales tax. However, Oregon stands out as one of five states in the US that doesn’t have a sales tax and the only state that has a “kicker law,” a constitutional mandate to return any revenue exceeding 2% of the forecasted amount directly to taxpayers. As a result, Oregon heavily relies on its personal income tax and is unable to create a safety net through excess revenues in prosperous years. In this thesis, I aim to determine the impact of state income tax rates by compiling the state income tax rate and unemployment rate from all 50 states between 1980 and 2018. Additionally, I create two dummy variables: one to indicate whether each state has a “kicker law” and another to denote whether the US is in an economic recession, as determined by the National Bureau of Economic Research (NBER) indicator. Using R Studio, I conducted a panel data linear regression to examine the relationship between these variables and the severity of recessions, as indicated by state-level unemployment rates. The findings reveal a statistically significant negative relationship between state income tax rate and unemployment, suggesting that states with higher income tax rates tend to have lower levels of unemployment. As expected, there is also a statistically significant relationship between the US being in a recession and states experiencing higher unemployment rates. However, the interaction terms between recession and state tax rate, as well as recession and the presence of a kicker law, were not statistically significant. Improving our understanding of how different taxation methods affect a state's vulnerability to recessions will enable policymakers to design a budget that safeguards against the inevitable harms arising from future economic downturns. |
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