Tax Exporting:

Another important issue relating to taxes of decentralized governments is tax exporting. It is a common feature among state and local governments in several federal economies including the USA. Tax exportation arises in different ways. Some taxes imposed by a state reduce the income of input-owners of some other state who employ their inputs in the states' taxing jurisdiction. It does also occur when a state raises the taxes of goods manufactured within the state but purchased by out-of-state residents. The importance of tax exporting is that it has a bearing on the willingness of the residents of a jurisdiction to pay higher taxes. In other words, a Re.1/- increase in taxes tend to be valued less than Re.1/- by the local tax payers, if they know that part of the additional tax will be borne by the people of other jurisdictions.  All these issues discussed above are to be kept in mind while assigning the tax bases to different levels of government in a federal economy.

Efficiency and equity issues always assume importance in almost all the federal economies with reference to the division of functional responsibilities as well as assignment of tax powers among different levels of government.  What is required  is a rational mix of efficiency and equity with regard to assigning of functions and tax powers and a continuous adjustment with a view to maximize welfare gains of the people.