Beyond free riding or free racing: a framework for understanding subnational tax policy interdependence

Abstract Subnational governments operating under the same federal fiscal arrangements often make markedly different tax policy choices. Research explains this variation through vertical relationships between subnational and national governments, horizontal relationships among subnational governments, or both, and along either economic or political logics. This study offers a unifying analytical framework integrating these dimensions and logics to help scholars locate their research within the wider literature, identify adjacent processes that may interact with or confound their focal mechanisms, and specify appropriate empirical strategies. I illustrate the framework’s value through analysis of Mexico’s state vehicle ownership tax (2008–2024). Situating the analysis within the framework yields three competing arguments about how horizontal economic and political logics interact. Spatio-temporal analysis shows that partisan competition, not geographic proximity, is the primary channel of horizontal tax policy interdependence. This partisan effect is conditional on neighbors’ tax activity, but in an unexpected way: it is strongest where neighboring states hold their taxes steady and weakest where they are cutting most heavily. The case demonstrates the framework’s usefulness in revealing new substantive findings and prompting new theoretical questions.