As state governments grapple with increased revenue 
needs or demands for state tax reform, they typically 
must choose between relying on an income tax system 
or utilizing a sales tax, perhaps in conjunction with 
a corporate franchise tax. Choosing between these two 
tax options is often a contentious process, and many 
arguments can arise in the debates surrounding this issue.


In this study of small, open economic systems,  George 
R. Zodrow addresses the relative advantages and disadvantages 
of state sales and income taxes from an economic perspective. 
He evaluates the two options in terms of the criteria commonly 
used in the public finance literature, including economic 
efficiency, fairness, administrative simplicity, and tax 
exportability. Zodrow's study emphasizes how the comparison 
of state sales and income taxes is critically affected by 
the details of the alternative tax structures being considered, 
as well as by the nature of the interactions between the 
economy of a state and the rest of the nation and world, 
and by the interactions between the state and federal tax 
systems in the United States. He also considers briefly 
two alternatives to state sales and income taxes—increased 
utilization of user charges and the adoption of a state tax 
based on mildly progressive taxation of individual 
consumption rather than income.
 


In the final chapter, Zodrow applies his analysis to the 
current Texas tax system as well as proposals for the intro-
duction of a state income tax. This provocative case study 
will serve as an informative contribution to the continuing 
public policy debate over the state tax structure.




GEORGE R. ZODROW is professor and chair of the 
Department of Economics at Rice University. He has 
published numerous scholarly articles and books on taxation 
and has served as a consultant on tax policy to the U.S. 
Treasury Department and various foreign governments.


Number Fifteen: Texas A&M University Economics Series