Corporate tax policy and multinational corporations in the American states: Exploring the intervening effect of local fiscal decentralization

Abstract

ABSTRACTA small, but growing, body of literature examines how corporate tax policy affects foreign firm location decisions in the United States. Yet, existing studies have not investigated how taxing choices interact in different state institutional characteristics, particularly a degree of fiscal independence of a local government in a state. The large literature on fiscal decentralization suggests that taxing and spending powers delegated to subnational governments correlate positively with growth, due to enhanced economic development at the local level. Based on this argument, the level of fiscal decentralization within a state should moderate the impact of state corporate tax policy on foreign direct investment inflows. This research empirically assesses the moderating impact of the level of fiscal decentralization on foreign direct investment (FDI) inflows in the 50 American states by source country between 1977 and 2006. The empirically derived results suggest that a higher degree of fiscal decentralization in states offsets the negative impact of a corporate tax on FDI.