Competitive, Political, and Economic Factors Influencing State Tax Policy Changes

Abstract

This study investigates subnational (state) tax competition for mobile business capital and employment. We focus on business income apportionment formulas (i.e., the weights placed on property, employment, and sales to determine how multijurisdictional companies' income will be allocated among states) and investigate whether early formula changes affect competing states' decisions to change. We use a form of survival analysis to predict the timing of states' apportionment formula changes using competing states' changes as predictors, along with economic and political factors that also influence tax policy. We predict a positive relation between the probability that a state will change its apportionment formula in a given year and the number and timing of competing states' changes. Our results are consistent with this hypothesis and with the conclusion that subnational (state) governments compete for capital and jobs (ultimately for tax revenue) by responding to competing governments' tax policy decisions. Our study sheds light on subnation responses to multijurisdictional tax planning and highlights the dynamic nature of the tax planning environment. We also contribute to the literatures on international and subnational tax policy and tax competition by documenting relationships that are consistent with tax competition hypotheses and by improving our understanding of factors that lead to tax competition and its counterpart, tax harmonization.

Note: Previously titled "Strategic, Political, and Economic Factors Influencing State Tax Policy Changes"

Keywords: State, tax, strategic, apportionment, externalities

JEL Classification: H23, H25, H71, H73, H77