How Does Rolling Conformity Affect State Tax Revenue?

Abstract Recent federal tax legislation has dramatically altered the landscape of state taxation. A product of this change is the increased interest in rolling conformity among corporate income taxing states. Under rolling conformity, states adopt federal tax provisions on a continual basis without the need for legislative approval. Despite its benefits, academic literature theorizes that rolling conformity is associated with several attributes that may negatively impact state budgets. The author assesses the merits of these concerns by examining the effect of rolling conformity on state corporate tax revenue. The author’s results suggest that corporate tax revenue in rolling conformity states is more sensitive to federal tax policy, experiences more volatility, and is subject to larger forecast errors. Moreover, the author finds that the effects of rolling conformity on state corporate tax revenue are economically significant. The author’s findings provide new insight into state tax conformity policy decisions and their ex-post consequences.