The purpose of this paper is to develop a strategic model of interjurisdictional competition where regions choose taxes on two types of capital (locally and absentee owned) and set a level of local environmental quality. Regional strategic interactions are introduced to reinforce the differential returns to and tax treatment of capital types. Moreover, the choice of the level of environmental quality by a jurisdiction is allowed to effect the returns to mobile capital types. The joint determination and fiscal interaction of these three policy variables leads to efficiency in the devolved game. Taxation of mobile capital will not distort the choice of environmental standards when public goods are provided efficiently. Efficiency in public goods provision is accomplished with capital tax exporting.
Keywords: environmental federalism, tax competition, tax exporting
