Int Tax Public Finance (2010) 17: 271–294 DOI 10.1007/s10797-009-9118-z Consumption tax competition among governments: Evidence from the United States Jan P.A.M. Jacobs · Jenny E. Ligthart · Hendrik Vrijburg Published online: 24 June 2009 © The Author(s) 2009. This article is published with open access at Springerlink.com Abstract The paper contributes to a small but growing literature that estimates tax reaction functions of governments competing with other governments. We analyze consumption tax competition between US states, employing a panel of state-level data for 1977–2003. More specifically, we study the impact of a state’s spatial char- acteristics (i.e., its size, geographic position, and border length) on the strategic in- teraction with its neighbors. For this purpose, we calculate for each state an average effective consumption tax rate, which covers both sales and excise taxes. In addition, we pay attention to dynamics by including lagged dependent variables in the tax re- action function. We find overwhelming evidence for strategic interaction among state governments, but only partial support for the effect of spatial characteristics on tax setting. Tax competition seems to have lessened in the 1990s compared to the early 1980s. Keywords Tax competition · Tax reaction function · Consumption taxation · Spatial lag JEL Classification H73 · H87 · H20 · H70 · C33 J.P.A.M. Jacobs University of Groningen, Groningen, The Netherlands J.E. Ligthart (�) CentER and Department of Economics, Tilburg University, P.O. Box 90153, 5000 LE, Tilburg, The Netherlands e-mail: [email protected] J.E. Ligthart Department of Economics, University of Groningen, P.O. Box 800, 9700 AV, Groningen, The Netherlands H. Vrijburg Erasmus University Rotterdam, Rotterdam, The Netherlands 272 J.P.A.M. Jacobs et al. 1 Introduction US states have the legal power to set their own sales and excise taxes on goods and services. Consequently, sales tax rates and bases differ by state.