What Do We Know About the Interstate Economic Effects of State Tax Incentives?

54 Pages Posted: 7 Dec 2005  

Kirk J. Stark

University of California, Los Angeles (UCLA) - School of Law

Daniel J. Wilson

Federal Reserve Bank of San Francisco

Abstract

Over the last few decades, state and local governments increasingly have adopted tax and other policies to encourage economic development within their borders. These programs have recently come under attack as potentially inconsistent with the U.S. Supreme Court's dormant Commerce Clause jurisprudence. In an opinion issued in late 2004, the Sixth Circuit Court of Appeals invalidated Ohio's investment tax credit, contending that it discriminates against interstate commerce. The U.S. Supreme Court has granted certiorari in the case. In the meantime, similar litigation is underway in other states. In reaction to these developments, legislation has been introduced in Congress to protect the right of states to provide tax incentives. To shed light on the issues involved in these ongoing controversies, we offer an introduction to existing research concerning the economic effects of state tax incentives. There is a voluminous literature concerning the efficacy of state business subsidies. Surprisingly, however, very few econometric studies have examined the multistate impact of tax credits for physical investment (for example, the investment tax credit) or research and development (R&D tax credits). This focus may be due in part to the fact that, up until now, the issue was primarily one for state and local policymakers. Yet the interstate economic effects have significance for the Commerce Clause analysis of state tax incentives. Our goal is to provide a general introduction to these issues and to shed some light on the complexities involved in evaluating interstate economic effects.

Keywords: taxation, fiscal federalism, multistate tax, commerce clause, tax discrimination, tax incentives

JEL Classification: K34

Suggested Citation

Stark , Kirk J. and Wilson, Daniel J., What Do We Know About the Interstate Economic Effects of State Tax Incentives?. Georgetown Journal of Law & Public Policy, Vol. 4, 2005; UCLA School of Law, Law-Econ Research Paper No. 05-29. Available at SSRN: https://ssrn.com/abstract=868692

Kirk J. Stark (Contact Author)

University of California, Los Angeles (UCLA) - School of Law ( email )

385 Charles E. Young Dr. East
Room 1242
Los Angeles, CA 90095-1476
United States
310-825-7470 (Phone)

Daniel J. Wilson

Federal Reserve Bank of San Francisco ( email )

101 Market Street
Mail Stop 1130
San Francisco, CA 94105
United States

HOME PAGE: http://www.frbsf.org/economics/economists/dwilson.html

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