Tax Breaks for Swing States? The Economic Consequences of Regional Political Competition

Abstract

Competitive regional elections can bring both economic benefits and drawbacks to local firms. We show that the benefits stemming from a ``swing'' region's strategic leverage depend on whether partisan control of national power is near a tipping point. At the regional level, swing states receive increased federal financial assistance relative to partisan states when the U.S. Senate is relatively gridlocked. At the firm level, swing-state firms receive relative increases in tax subsidies and decreases in effective tax rates when the Senate is relatively gridlocked. This is accompanied by higher market valuations and increased investments, but not operational performance improvements. To reinforce our valuation findings, we exploit the 2021 Georgia runoff election to show that swing-state firms' relative stock returns increased after an unexpected balancing of the Senate.

Keywords: political competition, tax credits, government policy, firm value, political economy

JEL Classification: D72, G32, G38, H25