State Tax Rates Research Articles

Differential taxation in agricultural credit market

AbstractThis study examines whether the market competitiveness of farm loan suppliers is affected by the US tax policy for the farm credit system (FCS) and its potential spillover on the farmers' cost of borrowing. We exploit the variation in the corporate income tax rate to estimate its relationship with the farm debt share of the FCS and the potential spillover effect on the estimated cost of borrowing for agricultural loans. Results suggest that a 10% rise in the state (federal) tax rate is associated with an increase in FCS's total farm debt market share by 1.76% (3.76%). A 10% rise in the FCS total farm debt market share tends to increase the cost of borrowing on agricultural loans by 0.06%. Overall, the findings imply that favorable tax treatment could increase FCS' competitiveness in the agricultural lending market. Also, an increase in the interest rate on farm debt is correlated with the increasing market share of FCS in the agricultural credit market. [EconLit Citations: Q14, N22, H2, H7, G21].

State Taxation of Nonresident Income and the Location of Work

Prior studies show that taxes matter for the residential locations of high-income earners. But states raise a significant share of revenue from nonresidents. Using variation in state tax rates, we provide causal evidence on the effect of the net-of-tax rate on the location of labor supply for professional golfers. State taxes induce high-income earners to shift employment to low-tax states without a residence change. The elasticity of working in a state is 0.34 and, consistent with the superstar phenomenon, increases with earnings. Our results suggest a novel margin of mobility responses for top earners: the spatial relocation of labor supply by nonresidents. (JEL H71, H73, J22, J44, J61, R23, Z22)

Vertical migration externalities

State income taxes affect federal income tax revenue by shifting the spatial distribution of households between high- and low-productivity states, thereby changing household incomes and tax payments. We derive an expression for these fiscal externalities of state taxes in terms of estimable statistics. An empirical quantification using American Community Survey data reveals that the externalities range from large and negative in some states, to large and positive in others. In California, an increase in the state income tax rate and the resulting change in the distribution of households across states lead to a decrease in federal income tax revenue of 39 cents for every dollar of California tax revenue raised. The externality amounts to a 0.27% decrease in total federal income tax revenue for a 1 pp increase in California’s state tax rate. Our results raise the possibility that state taxes may be set too high in high-productivity states, and set too low in low-productivity states.

Corporate taxes and union wages in the United States

This paper evaluates the effect of US state corporate income taxes on union wage premiums. American workers who belong to unions are paid more than their non-union counterparts, and this difference is greater in low-tax locations, possibly reflecting that unions and employers share tax savings associated with low tax rates. In 2000, the difference between average union and non-union hourly wages was $1.88 greater in states with corporate tax rates below four percent than in states with tax rates of nine percent and above. Controlling for observable worker characteristics, a one percent lower state tax rate was associated with a 0.17 percent higher union wage premium, suggesting that workers in a fully unionized firm capture roughly 31 percent of the benefits of low tax rates. By 2019, state tax rates appear to have little effect on the union wage premium, reflecting changes in union power and the opportunity cost of capital.

The effects of state ownership and tax rate cuts on accounting conservatism: evidence from Vietnam

PurposeThe purpose of this paper is to examine the joint effects of state ownership and tax rate cuts on accounting conservatism, considering the different levels of foreign ownership in the context of Vietnam.Design/methodology/approachThe paper uses ordinary least squares regressions and a data set of 405 firms covering the period 2007 to 2019. The manuscript uses three measures of accounting conservatism: Basu’s 1997 timeliness of earnings, Basu’s 1997 earnings persistence and the book-to-market ratio.FindingsState-owned enterprises (SOEs) adopt less accounting conservatism than non-SOEs; however, the result is only robust in firms with foreign ownership being lower than the foreign ownership median. Firms increase accounting conservatism in the year immediately prior to the year that the tax rate cuts become effective. An SOE possesses an unusual conflict both as a taxpayer and in having its controlling interest held by the government, which is both a tax creator and a tax collector. Interestingly, the increase in accounting conservatism prior to the year of the tax rate cuts is more pronounced for non-SOEs than SOEs.Practical implicationsThis research is beneficial to investors and policymakers where the government is both the taxpayer and tax collector and in emerging markets where foreign investment is local firms’ important financing.Originality/valueTo the best knowledge, this study is the first in examining the joint effects of state control and tax rate cuts on accounting conservatism.

Summaries of Articles

Summaries of Articles

Raising the Stakes: How Individual Taxes Affect Risk-Taking by Pass-Through Businesses

Pass-through businesses (PTBs) generate over 60 percent of U.S. business income. Despite their economic significance, little is known about how individual taxes affect risk-taking by PTBs. This is important because PTBs are subject to a different tax system than traditional corporations, with characteristics that predict divergent relations between tax rates and risk-taking. We study PTBs using the unique setting of thoroughbred racing and examine how taxes affect the decision to enter thoroughbreds in risky stakes races or less risky allowance races. The setting is advantageous because we can observe the choice between two discrete investment options with varying levels of risk. Using multiple difference-in-differences designs that exploit plausibly exogenous changes in federal and state tax rates, we find that higher taxes discourage risk-taking. Our findings suggest that owners of PTBs still face a significant degree of tax loss asymmetry, which affects investment behavior.

The effects of state ownership and tax rate cuts on accounting conservatism: evidence from Vietnam

The effects of state ownership and tax rate cuts on accounting conservatism: evidence from Vietnam

Tax Incentives and Housing Decisions: Investigating Effects of the Tax Cut and Jobs Act

The Tax Cut and Jobs Act (TCJA) altered the tax code, greatly reducing itemization rates. Utilizing American Community Survey data combined with the NBER TAXSIM program, we calculate the TCJA caused the average homeownership subsidy to decline by 56% from $2,677 in 2017 to $1,171 in 2018. Comparing similar households that vary in subsidy shock exposure due to state tax rates and house price levels, we nd that each percentage point decrease in the TCJA homeownership subsidy lowers homeownership rates by 0.54 percentage points and mortgage utilization by 0.76 percentage points. Using Freddie Mac mortgage origination data, we additionally nd that lenders absorbed 5% to 7% of the subsidy incidence through decreasing mortgage interest rates.

The Jock Tax: How the National Football League Can Level the Playing Field

There are thirty-two NFL teams located across twenty-three different states. State and local tax rates assessed in the different locations range from 0% to 13.3%. NFL teams play at least sixteen games every year, eight of which are played at opposing team’s locations. Due to this, NFL players can be required to file upwards of nine different state and local tax returns per season. This study analyzes the effects the difference in tax rates have on the competitive landscape of the NFL and proposes a solution to eradicate the competitive advantage state and local taxes currently create within the NFL. Specific player contracts and hypothetical player movements are analyzed to demonstrate the actual effects of state and local taxation on NFL players.

Spatially variable taxation and resource extraction: The impact of state oil taxes on drilling in the US

We estimate the responsiveness of nonrenewable resource firms to taxes on output using spatially explicit data from the oil sector in the United States. Using a model of resource firm capital allocation over space, we show that responses to spatially-varying taxes differ from responses to equivalent changes in the common output price. A larger response to tax rates occurs because the tax change only affects the returns to drilling in a single state, whereas a price change affects both the returns to drilling in a state and the opportunity cost of not drilling in other states. Econometrically, we estimate the effect of severance taxes on oil drilling. We find that the response to a one dollar increase in tax per unit of production has an effect at least eight times as large as the effect of an equivalent decrease in output price. The tax response is inelastic, implying that an increase in state tax rate would increase revenue. We do not find evidence of spillovers between states in the local areas near state borders.

The Effect of Taxes on Where Superstars Work

Prior studies show that taxes matter for the residential locations of high-income earners. But, states raise a significant share of revenue from nonresidents, especially superstars. Using superstar athletes and variation in state tax rates, we provide causal evidence on the effect of the net-of-participation tax rate on the location of labor supply. State taxes induce high-income earners to shift employment contracts to low-tax states. The elasticity of working in a state is 0.32, and consistent with superstar phenomenon, increases with earnings. Our results suggest a novel margin of mobility responses for top-earners: the spatial relocation of labor supply by nonresidents.

Heterogeneous vertical tax externalities and macroeconomic effects of federal tax changes: The role of fiscal advantage

How do state tax rates respond to federal tax shocks? This paper presents a novel mechanism of heterogeneous vertical tax externalities across state-levels of fiscal advantage, showing that tax increases can be expansionary – even without their reinvestment. States rich in natural resources have a fiscal advantage in the inter-state competition over production factors which allows them to respond better to increases in federal taxes and, consequently, attract capital from other parts of the nation. We add heterogeneity in fiscal advantage levels to an otherwise standard model of vertical tax externalities and horizontal tax competition. The model shows that, irrespective of federal redistribution, the contractionary effect of a federal tax increase can be overturned in fiscally advantaged states, through an increase in their tax base. Using the case of the U.S., and narrative-based measures of federal tax shocks a-la Romer and Romer (2010), we provide empirical evidence for the various aspects of this mechanism. Specifically, our baseline estimates indicate that, controlling for federal transfers, a 1% increase in the GDP share of capital-related federal taxes at the beginning of a year increases the growth rate of the per capita tax base by approximately 0.7% in high fiscal advantage states at the end of it.

Valuation of mortgage interest deductibility under uncertainty: An option pricing approach

Abstract We propose a dynamic option pricing model to quantify the tax shield value of US mortgage interest deduction (MID) under uncertainty. We identify non-linear forms, both convex and concave regions, in the pay-off of MID, and discuss the implications for the valuation of MID. The model provides insights regarding the relationship between the effective MID and a set of underlying variables, including income level, house price, mortgage size, and state and local tax rates. We also show how the tax shield value of mortgage loans changes with the volatility of underlying processes. We apply the model to the case of the optimal choice of adjustable versus fixed-rate mortgages and prove that under a mean-preserving interest rate, an adjustable mortgage always offers a bigger tax saving. We use the framework to study how the tax reforms of 2017 have affected the MID benefits of different households, and find that no household is expected to receive a larger mortgage deduction under the new law. Finally, we find that, by putting a cap on deductible state and local taxes, the 2017 reform has significantly reduced the quantitative impact of income and house price volatility on the expected MID value.

Securitization and Accounting Quality: Evidence from Collateralized Loan Obligations

Using a large sample of collateralized loan obligation (CLO) portfolios, we examine the role of borrowers’ accounting quality in corporate loan securitization. We find that loans from companies with higher ex-ante accounting quality are more likely to be purchased and securitized by CLOs. Further analyses show that such a positive association is mainly due to the role of accounting information in alleviating the adverse selection problem in the pre-securitization period. We also examine the role of accounting information in the post- securitization period. Using the state tax rate as an instrument for securitization, we find that accounting information does not affect the default sensitivity to CLO ownership, suggesting that CLOs do not utilize accounting information in the ex-post monitoring. Overall, our findings suggest that CLOs exert great effort and care in screening during the origination phase, but have limited incentives and the ability to monitor ex post.

Taxes on Unhealthy Food and Externalities in the Parental Choice of Children's Diet

This paper addresses the question whether taxes on unhealthy food are suitable for internalizing intergenerational externalities inflicted by parents when they decide on their children’s diet. Within an OLG model with an imperfectly altruistic parent, the optimal steady state tax rate on unhealthy food is strictly positive. However, it is only second best since it not only reduces food consumption of the child but also distorts the parent's food consumption. Surprisingly, the optimal tax may under- or overinternalize the marginal damage.

State Taxes and Spatial Misallocation

We study state taxes as a potential source of spatial misallocation in the U.S.. We build a spatial general equilibrium framework that incorporates salient features of the U.S. state tax system, and use changes in state tax rates between 1980 and 2010 to estimate the model parameters that determine how worker and firm location respond to changes in state taxes. We find that heterogeneity in state tax rates leads to aggregate welfare losses. In terms of consumption equivalent units, harmonizing state taxes increases worker welfare by 0.6% if government spending is held constant, and by 1.2% if government spending responds endogenously. Harmonization of state taxes within Census regions achieves most of these gains. We also use our model to study the general equilibrium effects of recently implemented and proposed tax reforms.

Effects of State Taxation on Investment: Evidence from the Oil Industry

We provide theoretical and empirical evidence that firms do not in general respond equally to changes in prices and taxes in the setting of oil well drilling in the United States. Our key theoretical contribution is that in a multi-state model, a change in output price changes both the benefit and opportunity cost of drilling, whereas a change in a state tax rate only changes the benefit of drilling in that state. Thus, a firm responds more to a change in tax than a change in price. Our econometric results support this theoretical prediction. We find that a one dollar per barrel increase in price leads to a 1 percent increase in wells drilled, but a one dollar per barrel increase in tax leads to at least an 8 percent decrease in wells drilled. These estimates correspond to elasticities of about 0.5 and -0.3, respectively. These results are robust to interstate spillovers, other state regulations, and econometric specification. They imply that using state tax rate decreases to incentivize investment may lead to losses of government revenue.

Effects of State Taxation on Investment: Evidence from the Oil Industry

We provide theoretical and empirical evidence that firms do not in general respond equally to changes in prices and taxes in the setting of oil well drilling in the United States. Our key theoretical contribution is that in a multi-state model, a change in output price changes both the bene t and opportunity cost of drilling, whereas a change in a state tax rate only changes the bene t of drilling in that state. Thus, a firm responds more to a change in tax than a change in price. Our econometric results support this theoretical prediction. We nd that a one dollar per barrel increase in price leads to a 1 percent increase in wells drilled, but a one dollar per barrel increase in tax leads to at least an 8 percent decrease in wells drilled. These estimates correspond to elasticities of about 0.5 and -0.3, respectively. These results are robust to interstate spillovers, other state regulations, and econometric specification. They imply that using state tax rate decreases to incentivize investment may lead to losses of government revenue.

The Economics of Managerial Taxes and Corporate Risk-Taking

ABSTRACTWe examine the relation between managers' personal income tax rates and their corporate investment decisions. Using plausibly exogenous variation in federal and state tax rates, we find a positive relation between managers' personal tax rates and their corporate risk-taking. Moreover—and consistent with our theoretical predictions—we find that this relation is stronger among firms with investment opportunities that have a relatively high rate of return per unit of risk, and stronger among CEOs who have a relatively low marginal disutility of risk. Importantly, our results are unique to senior managers' tax rates––we do not find similar relations for middle-income tax rates. Collectively, our findings provide evidence that managers' personal income taxes influence their corporate risk-taking decisions.JEL Classifications: G30; G32; G38; H24; H32.Data Availability: Data are available from the sources cited in the text. Data on manager tax rates used in this paper are available at: http://acct.wharton.upenn.edu/∼dtayl/.