Federal Tax Policies, Congressional Voting, and the Fiscal Advantage of Natural Resources

What determines legislators' ’voting behavior over federal tax policies? Conventional wisdom points primarily at party affiliation. This paper presents a novel mechanism of voting patterns across state-levels of scal advantage. We construct a political economy model of scal federalism with state scal asymmetries that originate in heterogeneity in natural resource abundance, representing a non-mobile source of income that provides a scal advantage in the inter-state scal competition. The model shows that representatives of natural resource rich states are more willing to vote in favor of federal tax increases, despite the lower net scal bene fits their states receive. This occurs because these states can reduce their tax rates as a response to an increase in the federal tax rate, and hence attract capital from the rest of the nation to the extent of increasing their pre-shock tax base. Data on roll-call votes in the U.S. Congress over major changes in federal tax bills in the post WW-II period support the predicted voting patterns. Speci cally, we nd that elected officials of resource rich states are more (less) supportive of capital-related federal tax increases (decreases), controlling for their party affiliation, ideology, federal transfers, and economic conditions. Our results indicate that the scal advantage channel is as dominant as party affiliation in driving legislators' ’voting decisions over federal tax policies.