Business taxes influence the implicit rental cost of capital. However, the relationship between the changes in the cost of capital and the change in the size and timing of business tax receipts may be unique to that particular tax provision. For example, a change in the corporate tax rate that increases the cost of capital by one percent next year may yield revenue to change the investment tax credit by enough to cut the cost of capital by two percent. Thus, a tax change that is revenue neutral might reduce the cost of capital in the short term and stimulate investment in the state. To carry out tax simulations, the revenue consequences must also be estimated.
Sales taxes enter the model as an increase in consumer prices.
Of course, the decreased purchasing power caused by increased sales taxes reduces local purchases and, thus, local employment. Sales tax increases also deter inward migration by driving a bigger wedge between nominal personal and real disposable income. Changes in income taxes reduce purchasing power by directly reducing disposable income and, therefore, have many of the same impacts in an economy as a sales tax change. Local governments may change property taxes. These changes effect the cost of capital and directly reduce consumer purchasing power.