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Tax Cannibalization and State Government Tax Incentive Programs

6 Pages Posted: 16 Nov 2016 Last revised: 20 Jan 2017

David Gamage

Indiana University Maurer School of Law

Darien Shanske

University of California, Davis - School of Law

Date Written: October 17, 2016

Abstract

States and localities offer businesses an enormous amount of tax incentives to locate within their jurisdictions despite: 1) the mass of evidence that suggests that these incentives are not particularly effective and, 2) substantial doubts about their constitutionality.

In this essay, we develop a new critical perspective on state tax incentives. We argue that offering these incentives permits states to offer lower taxes to more mobile businesses while keeping their overall corporate tax rates high. This is arguably not the best choice for the states, but it is definitely not the best choice for the federal government. Because the states share the corporate income tax base with the federal government, higher overall state corporate income tax rates results in more cannibalization of federal corporate income tax revenue.

Keywords: tax law, tax policy, fiscal federalism, tax cannibalization

JEL Classification: K34

Suggested Citation

Gamage, David and Shanske, Darien, Tax Cannibalization and State Government Tax Incentive Programs (October 17, 2016). State Tax Notes, Vol. 82, No. 3, October 2016; Indiana Legal Studies Research Paper No. 364. Available at SSRN: https://ssrn.com/abstract=2869605

David Gamage

Indiana University Maurer School of Law ( email )

211 S. Indiana Avenue
Bloomington, IN 47405
United States

HOME PAGE: http://www.law.indiana.edu/about/people/bio.php?name=gamage-david

Darien Shanske (Contact Author)

University of California, Davis - School of Law ( email )

400 Mrak Hall Dr
Davis, CA CA 95616-5201

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