State Taxation and the Reallocation of Business Activity: Evidence from Establishment-Level Data
In a sample of over 27 million establishments of U.S. firms with activities in more than one state, we estimate the impact of state business taxation on business activity. Only firms organized as subchapter C corporations are subject to the corporate tax code, whereas the income of partnerships, sole-proprietorships, and S corporations is passed through annually to the firm's owners and taxed at individual rates. For C corporations, both employment at existing establishments (intensive margin) and the number of establishments in the state (extensive margin) have corporate tax elasticities of -0.4. Pass-through entities, which serve as a control group for the corporate tax reforms, respond only to the personal tax code, with tax elasticities of -0.2 to -0.3. Around half of the effects are driven by reallocation of productive resources to other states where the treated firms have establishments. Capital shows similar patterns but is 36% less elastic than labor. A narrative approach confirms that the results are robust and strongest in the sample of tax changes that were implemented due to inherited budget deficits, long-run goals, or cross-state variation caused by Federal tax reforms.
We thank David Colino, Bryan Chang, and Young Soo Jang for research assistance. We are grateful to Jeffrey Brown, Austan Goolsbee, Holger Mueller, Amit Seru, and seminar participants at Stanford GSB for helpful discussions. Any opinions and conclusions expressed herein are those of the authors and do not necessarily represent the views of the U.S. Census Bureau. All results have been reviewed to ensure that no confidential information is disclosed. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
I have periodically received speaking fees, consulting fees, or honoraria. During the last four years, I have received these types of fees from each of the following organizations: the American Finance Association, the Brattle Group, the Brookings Institution, Commonfund, Cornerstone Research, the Hoover Institution, the Kauffman Fellows Program, Makena Capital Management, NC State University, Netspar, NBER, Stanford University, SIEPR, University of California Irvine, University of California Berkeley, University of Florida, University of Pennsylvania IUR, University of Oregon, and Loyola Marymount University. In 2013, I received a research grant from the Social Security Administration, through grant #5RRC08098400-05-00 to the National Bureau of Economic Research as part of the SSA Retirement Research Consortium.
Xavier Giroud & Joshua Rauh, 2019. "State Taxation and the Reallocation of Business Activity: Evidence from Establishment-Level Data," Journal of Political Economy, vol 127(3), pages 1262-1316.