State Taxation and the Reallocation of Business Activity: Evidence from Establishment-Level Data

by Xavier Giroud, Joshua D. Rauh
Monday, February 1, 2016

Economics Working Paper 16103

Abstract: Using Census microdata on multi-state firms, we estimate the impact of state taxes on business activity. For C corporations, employment and the number of establishments have corporate tax elasticities of .0.4, and do not vary with changes in personal tax rates. Pass-through entity activities show tax elasticities of -0.2 to -0.3 with respect to personal tax rates, and are invariant with respect to corporate tax rates. Reallocation of productive resources to other states drives around half the effect. Capital shows similar patterns but is 36% less elastic than labor. The responses are strongest for firms in tradable and footloose industries.

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