A longstanding concern of state and local governments is that a federal value-added tax (VAT) could shrink sales tax bases. But a federal VAT could have even bigger effects on other revenues and spending through changes in incomes, relative prices, and asset values. To illustrate the range of budgetary effects of a VAT, we examine both a broad and narrow based VAT, with no change and an increase in the price level, and both short- and long-run time horizons. We find that, in some circumstances, a federal VAT could even improve the fiscal position of states and localities.
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