State Taxation and the Reallocation of Business Activity: Evidence from Establishment-Level Data


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Abstract

Using Census microdata on multi-state .rms, we estimate the impact of state taxes on business activity. For C corporations, employment and the number of establishments have corporate tax elasticities of .0.4, and do not vary with changes in personal tax rates. Pass through entity activities show tax elasticities of .0.2 to .0.3 with respect to personal tax rates, and are invariant with respect to corporate tax rates. Reallocation of productive resources to other states drives around half the e¤ect. Capital shows similar patterns but is 36% less elastic than labor. The responses are strongest for .rms in tradable and footloose industries.