Taxing State Governments under a Federal Value Added Tax : Part 2

In the first article of this series, I considered the proper treatment of state governments under a hypothetical federal value added tax. In this article, I extend that analysis. As in the first article, I assume that a federal VAT should maintain neutrality between goods provided by the private sector and those provided by state governments. Although the federal government may well wish to subsidize state governments' provision of particular goods, such subsidies are better provided through specific grant programs than through the VAT system. Also, the VAT should surely not favor in-house production of goods by state governments' own employees and capital stock over state governments' production of goods using inputs purchased from private firms