The Effect of Tax Avoidance Crackdown on Corporate Innovation

Abstract

To constrain the use of intangible assets in tax-motivated state income shifting, many U.S. state governments adopted addback statutes. Addback statutes reduce the tax benefits that firms can gain from creating intangible assets such as patents. Using a sample of U.S. public firms, we examine the effect of addback statutes on corporate innovation behavior. First, the adoption of addback statutes leads to a 4.77 percentage point decrease in the number of patents and a 5.12 percentage point decrease in the number of patent citations. Second, the “disappearing patents” resulting from addback statutes have significant economic value. Third, after a state adopts an addback statute, a firm with material subsidiaries in that state assigns fewer patents to subsidiaries in zero-tax states, whereas the number of patents assigned to the other states does not change. Overall, our findings suggest that addback statutes impede corporate innovation.