Working Paper

Opting in with the Joneses: What Affects the Timing of Municipal Adoption of a Local-option Meals Tax?

Abstract: States use local-option taxes to promote local revenue diversification and improve local fiscal health. However, many sub-state governments wait a long time before adopting local-option taxes or do not adopt them at all, which seems puzzling or even irrational upon first glance. This paper uses the local-option meals tax in Massachusetts as a case study to examine the factors that affect the timing of local adoptions. It finds significant positive results for adoption by neighboring municipalities, which are robust to a variety of specifications, neighbor definitions, and weighting matrices. The adoption hazard also increases if a municipality faces greater fiscal stress, such as being more constrained by a property tax limitation or receiving a larger cut in state aid. In addition, the form of local government, size of the meals tax base, and ability to export the tax to non-residents are important factors.

Keywords: hazard models; fiscal stress; policy diffusion; local-option tax; yardstick competition;

JEL Classification: C41; H71; H73; H77; R50;

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Bibliographic Information

Provider: Federal Reserve Bank of Boston

Part of Series: Working Papers

Publication Date: 2021-10-01

Number: 21-14