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Corporate Income Tax Systems and State Economic Activity

Advances in Taxation

ISBN: 978-1-78441-120-6, eISBN: 978-1-78441-119-0

Publication date: 18 November 2014


We examine whether variations in the most fundamental aspects of state corporate income tax regimes affect state economic activity as measured by personal income, gross state product, and total non-farm employment. We focus on a variety of statutory components of state corporate income taxes that apply broadly in most U.S. states and for most multi-state corporate taxpayers. Our econometric strategy consists of a series of fixed effects panel regressions using state-level data from 1996 through 2010. Our results reveal important interaction effects of tax rates and policies, suggesting that policy makers should avoid making decisions about tax rates in isolation. The results demonstrate a relatively consistent negative economic response to the combination of high tax rates with throwback rules and heavy sales factor weights. Combined reporting has no discernible effect on personal income, GSP, or employment after controlling for tax rates, apportionment, and throwback rules. In an effort to gauge the relative impacts of tax policies on the location of economic activity, we also estimate alternative models in which each state’s economic activity is measured as a share of the national economic activity in each year. Statistically significant effects for tax rates, apportionment formulas, and throwback rules in the shares models suggest that at least some of their impact involves the movement of activity across state lines, thereby leaving open the possibility of a zero-sum game among the states.




The authors are grateful for helpful comments from William Fox, workshop participants at the University of Tennessee, Elliott Dubin (discussant), and conference participants at the National Tax Association Annual Meeting on earlier versions of the paper. We also thank Toby Stock (Editor), two anonymous referees, Ken Anderson, Bob Chirinko, John Deskins, and LeAnn Luna for their helpful comments and suggestions. We are especially indebted to Ann Boyd Davis for generous support of the data-gathering efforts for this paper and for her suggestions.


Moore, R.D. and Bruce, D. (2014), "Corporate Income Tax Systems and State Economic Activity", Advances in Taxation (Advances in Taxation, Vol. 21), Emerald Group Publishing Limited, Leeds, pp. 73-105.



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