Year of Publication

2008

College

Martin School of Public Policy and Administration

Executive Summary

In the past few decades state corporate income tax policy and coordination/harmonization of corporate income taxes have been regularly discussed in the tax policy literature. The reason for this level of attention is that capital is assumed to be highly mobile across nations or unions with multiple jurisdictions with differential corporate tax rates (Bucovetsky, 1991; Cnossen, 2003; Frey & Eichenberger, 1996; Gordon, 1983; Isard, 1990; Keen & Marchand, 1997). Further, much of the literature focuses on states’ “race to the bottom” in terms of corporate income taxation or incentives to base capital in their jurisdictions, and the tendency for this race/competition to cause inefficient levels of public services to be provided (Black & Hoyt, 1989; Bucovetsky, 1991; Edwards & Keen, 1995; Frey & Eichenberger, 1996; Keen & Marchand, 1997; Oates, 1972; Rushton 2000; Wilson, 1995, 1999). This has mainly to do with the fact that reductions in corporate income tax levels lower the revenues of local governments in a union or federal republic, though reliance on this revenue source varies across jurisdictions (Cnossen, 2003; Gordon, & Wilson, 1986; Wildasin, 1999; Zodrow, 2003).

Though most of the literature has focused on the inefficiencies caused by tax competition, more recent literature has taken an opposite or more neutral stance on the subject. Multiple scholars have found either inconclusive or positive benefits to tax coordination (Bovenberg, Cnossen & De Mooij, 2003;; Rounds, 1992; Wilson, 1995; Wilson & Wildasin, 2003, Zodrow, 2003). This paper synthesizes the current literature on the subject of state corporate tax policy and takes an empirical approach to determine what in fact drives the way in which states set corporate tax policy. Further, this paper will take an empirical approach to understand what forces create an impetus for change and which do not. This paper departs from the literature insofar as it looks at the determinants of state corporate tax policy as opposed to its consequences by looking at a number of variables from the 50 U.S. states. I propose that while tax competition is an important factor, a more straightforward answer to this question exists. That being that political considerations, in particular budgetary policy, are also important determinants of state corporate tax policy. The main questions to be answered in this analysis are: Do states adopt corporate tax rates adopted in nearby or geographically proximate states? Do states adopt corporate tax policies adopted by states with more similar characteristics? Do states consider a combination of the two? Or, do states choose a corporate tax policy with no regard to other states? Are there factors other than competition which drive changes in state corporate tax policy in a more direct fashion?

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