Tax Innovation in the States: Capitalizing on Political Opportunity

This paper assesses the factors that prompt states to adopt taxes during the twentieth century. We test five explanations of state tax innovation derived from the literature-economic development, fiscal health, election cycle, party control, and regional diffusion-using event history analysis, a pooled cross-sectional time-series technique. While little support is found for the economic development and party control explanations, our empirical results are highly consistent with a political opportunity explanation of state tax adoptions; (1) the presence of a long time until the next election, (2) the existence of a fiscal crisis, and (3) the presence of neighboring states that have previously adopted a tax all create opportunities for politicians to shield themselves from the political costs of supporting a tax increase and are all shown by empirical analysis to increase the probability of a tax adoption. This empirical evidence is consistent across different tax instruments and different periods of analysis throughout the twentieth century.