Tax Breaks for Swing States? Political Bargaining, Economic Redistribution, and Firm Outcomes

Abstract

We study how firms are affected by the political bargaining power of their home regions. Exploiting shocks to the strategic importance of swing states relative to partisan states stemming from partisan gridlock in the U.S. Senate, we show that corporate valuations and investments increase in response to predicted increases in regional political bargaining power. We further verify the valuation findings using an event study based on the 2021 Georgia runoff election that produced an unexpected balancing of the Senate. Reconciling our positive investment findings with previous studies that find a negative crowding-out effect, we show that tax incentives (rather than demand spillovers) form the driving mechanism behind our findings.

Keywords: firm value, tax credits, corporate investment, political bargaining

JEL Classification: D72, G32, G38, H25