State Versus Local Tax Enforcement Effectiveness: Evidence from Airbnb

The availability of local knowledge useful for enforcement of taxes is a common motivation for decentralized tax administration, a benefit to be traded away for economies of scale with centralization. However, there is limited empirical evidence that localized agencies are able to capitalize on this information advantage. This research exploits geographic variation in Colorado's level of government responsible for general local sales tax administration to investigate enforcement effectiveness relative to the state. Specifically, we employ data on Airbnb monthly listings from 2017 to 2019 to test for heterogeneity in the behavioral response to local sales tax increases. The results demonstrate larger reductions in Airbnb listings in response to sales tax increases where localities are responsible for tax enforcement, consistent with a model where local governments were more effective than the state at Airbnb detection. Further investigation indicates that local governments' advantage relative to the state was in detecting properties that were frequent listers on Airbnb.