Effects of State Taxation on Investment: Evidence from the Oil Industry

48 Pages Posted: 21 Sep 2018

See all articles by Jason Brown

Jason Brown

Federal Reserve Bank of Kansas City

Peter Maniloff

Colorado School of Mines

Dale Manning

University of California at Davis - Department of Agricultural and Resource Economics

Date Written: September 5, 2018

Abstract

We provide theoretical and empirical evidence that firms do not in general respond equally to changes in prices and taxes in the setting of oil well drilling in the United States. Our key theoretical contribution is that in a multi-state model, a change in output price changes both the bene t and opportunity cost of drilling, whereas a change in a state tax rate only changes the bene t of drilling in that state. Thus, a firm responds more to a change in tax than a change in price. Our econometric results support this theoretical prediction. We nd that a one dollar per barrel increase in price leads to a 1 percent increase in wells drilled, but a one dollar per barrel increase in tax leads to at least an 8 percent decrease in wells drilled. These estimates correspond to elasticities of about 0.5 and -0.3, respectively. These results are robust to interstate spillovers, other state regulations, and econometric specification. They imply that using state tax rate decreases to incentivize investment may lead to losses of government revenue.

Keywords: severance tax, drilling, supply elasticity

JEL Classification: Q32, Q48, R51

Suggested Citation

Brown, Jason and Maniloff, Peter and Manning, Dale, Effects of State Taxation on Investment: Evidence from the Oil Industry (September 5, 2018). Federal Reserve Bank of Kansas City Working Paper No. 18-07 , Available at SSRN: https://ssrn.com/abstract=3246052 or http://dx.doi.org/10.2139/ssrn.3246052

Jason Brown (Contact Author)

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States

Peter Maniloff

Colorado School of Mines ( email )

Golden, CO 80401
United States

Dale Manning

University of California at Davis - Department of Agricultural and Resource Economics ( email )

Apt 153

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
33
Abstract Views
382
PlumX Metrics