THE IMPACT OF MARGINAL BUSINESS TAXES ON STATE MANUFACTURING

Authors


  • This research is funded by a National Science Foundation collaborative research grant titled “The Impact of State and Local Taxes on Growth Using Improved Tax Measures,” BCS No. 0751615. The authors thank the editor, Mark Partridge, and the three anonymous referees whose helpful suggestions greatly improved this paper and led to its publication. We also acknowledge the valuable research assistance of Ashley Bross, Lawrence De Geest, Andrea Heffernan, Timothy Kehl, Leondra Lawson, and Lindsay Smith. Any errors or omissions are the authors’ own responsibility.

ABSTRACT

We estimate the impact of manufacturer business taxes on value added during the 1990s for 15 manufacturing sectors in 20 U.S. states. When the tax climate is properly measured as the potential liability arising from new investment in a state, we estimate that a 10 percent reduction in the effective tax liability is associated with a 3.5 to 5.3 percent increase in value added for the state's targeted manufacturing industry. When we isolate the value of industrial incentives from the basic tax system in our theoretically preferred marginal tax measure, we find that a 10 percent reduction in liability achieved by way of lowering taxes is associated with a 4.5 percent increase in value added while an equivalent reduction achieved by way of increasing incentives is associated with only 1.2 percent industrial growth, the latter elasticity not statistically different from zero.

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