Personal Taxes and Small Business Lending

Abstract

I investigate how local personal income taxes impact small business lending in the U.S. I use the staggered statutory changes of state tax rates as the identification to compare the loans granted in the adjacent counties across state borders using a matched dataset during 2001-2018. I find higher personal income taxes cause more negative loan outcomes, including smaller loan size, shorter maturity, higher default probability and higher charge-off ratio. Higher taxes also lead to smaller aggregate amount and growth rate of small business loans granted. These findings suggest the tax-induced deterioration in borrower creditworthiness constrains local banks’ small business lending.

Keywords: Personal income taxes, state tax policy, banks, loans, small businesses, local credit markets

JEL Classification: G21, G32, H24, H81, J21, L25