Bidding for Business: Tax Discrimination as Local Industrial Policy

Abstract

Local and state governments routinely compete for economic activity by offering firms tax breaks and subsidies. While we have empirical evidence to show that large industrial plants produce significant local benefits, we know little about the type of firm that local governments most seek to attract. To further our understanding of local tax discrimination, we conduct a randomized field experiment across 312 communities in the United States. We observe how each of the governments in our sample adjusts its property tax in response to variation in firm characteristics and local economic conditions. We find that our towns pursue a systematic local industrial policy whose goal is to attract manufacturing jobs and work for unskilled labor. Surprisingly, we find no evidence that towns seek to generate rents targeted at the current local population. Local tax policy also appears to disregard agglomeration effects and concerns over industrial diversification.