Coveting Thy Neighbor’s Manufacturing – Is State Tax Competition A Zero Sum Game?

Many people have been focused on state tax incentives of late. Earlier I posted about some work by Moretti and Greenstone that concludes local subsidies improve residents’ welfare (perhaps partly due to sizable employment spillovers). With that in mind, I wanted to highlight a  Journal of Public Economics paper by Austan Goolsbee & Edward Maydew that shows that state tax competition appears to be a zero sum game. They find that something that amounts to lowering corporate taxes in your state increases state employment but not national employment (see this post’s discussion of apportionment for more details):

ABSTRACT: This paper investigates the economic impact of the apportionment formulae used to divide corporate income taxes among the states. Most apportionment formulae, by including payroll, turn the state corporate income tax at least partially into a payroll tax. Using panel data from 1978-1994, the results show that this distortion has an important effect on state-level employment. For the average state, reducing the payroll weight from one-third to one-quarter increases manufacturing employment around 1.1%, concentrated in manufacturing and with larger effects in the long-run. The results also suggest that apportionment changes have important negative externalities on other states. On average, the aggregate effects of apportionment formula changes are close to zero.