Abstract
This paper discusses the political economy of U.S. state corporate tax reforms. Using a unique dataset of state effective corporate tax rates over the period 1969-2015, I observe that business tax changes are associated with tax competition, swings in economic cycles, and left-right political ideology. In contrast, long-term debt and budgetary pressures do not correlate with state corporate tax policies. Moreover, I document a regional heterogeneity and notice a slowdown in state tax changes after the Federal Reform Act of 1986. These findings matter for the empirics of corporate tax incidence, which is increasingly concerned with the endogeneity between tax reforms and other economic developments.
Highlights
Over the last few decades, several U.S states have lowered their tax rates on business profits
The goal of this paper is to provide a thorough description of the political economy of corporate tax reforms at the state level in the U.S I exploit a unique historical record of state effective corporate tax rates over the period 1969-2014 which was initially compiled by Chirinko and Wilson up until 2008
The main goal of this paper is to explore the significance of these relationships which would cofound the channel of association that runs from corporate tax reforms to economic outcomes
Summary
Over the last few decades, several U.S states have lowered their tax rates on business profits. Though long-term growth, globalization, public debt (Swank and Steinmo, 2002, Tanzi, 1995), tax competition, domestic business cycle, and regional shocks have all been suggested as potential drivers of national corporate tax reforms, no exhaustive investigation has been done at the state level. This consideration is critical for the consistency of empirical estimates of state corporate tax effects. Corporate taxation is part of an arsenal of instruments at the disposal of policymakers to spur long-term economic growth This implies that corporate tax rates in neighboring states could be useful predictors of policymakers’ incentives to amend the business tax code.
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