Federal tax cuts in the U.S. rarely reduce the total tax burden because states immediately raise their own rates to capture the difference.
March 31, 2026
Original Paper
The Vertical Fiscal Ratchet: Asymmetric State Tax Responses to Federal Tax Changes Over 100 Years
SSRN · 6461900
The Takeaway
Analyzing 100 years of data, this paper reveals a 'vertical fiscal ratchet' where states do not follow federal tax increases but aggressively move to fill the gap left by federal retreats. This means the money citizens 'save' from federal tax cuts is effectively siphoned off by state-level personal, corporate, and excise tax hikes.
From the abstract
Do federal tax cuts reduce the overall tax burden? Using a century-long panel of 48 continental U.S. states (1910-2022) across five tax types, I document a fundamental asymmetry in vertical fiscal interactions: states do not follow federal tax increases but actively raise their own rates when federal rates decline. This vertical fiscal ratchet is three to four times larger for federal decreases than increases and is consistent across personal income, corporate income, tobacco, gasoline, and spir