The Effects of State Business Taxes on Plant Closures: Evidence from Unemployment Insurance Taxation and Multiestablishment Firms

Abstract

Abstract This paper investigates the extent to which state-level differences in business taxes influence the location decisions of multiestablishment firms. Each state in the United States administers their own unemployment insurance program, and cross-state variation leads to significant tax differences across state lines. This decentralized administration creates opposing employment incentives on the intensive and extensive margins depending on the economic conditions. Studying the locations of multistate manufacturing firms, I find that firms are more likely to exit from high-tax states during economic downturns, but high-tax plants experience more stable employment during nonrecession years.