Understanding the interdependence in tax setting and tax revenues between the federal level and the state level is an important issue in the design of federal tax systems. This vertical relationship is a result of relying on similar tax bases which creates rivalry in tax collection: Changes in federal tax rates can create non-negligible effects on state budgets. Understanding these relations is important for the design of state as well as federal fiscal policy. This is the topic of this paper. Rivalry between the federal level and the state level over the same tax base is a relatively new topic in the fiscal federalism literature. Within this body of work, most theoretical and empirical studies focus on vertical tax competition, meaning primarily the effects of changes in federal tax rates on state tax rates; this work has provided conflicting results. In this paper I focus on vertical tax externalities, namely the effect of federal tax shocks on state tax revenues. I isolate a plausibly exogenous component of federal tax shocks using the narrative-based methodology proposed by Romer and Romer (2010) (henceforth RR) while differentiating between corporate and noncorporate taxation. I find that federal tax shocks are generating vertical tax externalities which are small in magnitude. More precisely, federal tax shocks moderately reduce state corporate tax revenues while having a negligible effect on non-corporate state tax revenues. Indeed, a $1 billion increase in federal tax revenues leads to a $27 million reduction in total state corporate tax revenues.