Taxing State Governments under a Federal Value Added Tax : Part 1

The federal government confronts a long-run fiscal imbalance arising from the rapid projected growth of Medicare, Medicaid, and Social Security spending compared with revenue. The enactment of a value added tax is often mentioned as a possible solution to this imbalance. This article is the first part of a two-part examination of the contentious issue of how state governments' provision of goods and services to the public should be taxed under a VAT.In this article, I focus on the case in which the state government's output takes the form of consumption rather than inputs into private production. I also assume in this article that state taxes do not affect private production. The second article in this series will generalize the analysis to consider state governments' provision of production inputs and the interaction of a federal VAT with state taxes