Do State Taxes Play a Role in Corporate Investment Decisions? Evidence from Interstate Investment

Abstract

Using a novel data set of state-specific investments at the project level and staggered changes in state corporate income taxes, I examine whether corporate income taxes affect firms’ investment location decisions in the U.S. In contrast to recent studies that document an insignificant effect on firm-level investments, I find that changes in state taxes have a significant effect on project-level investments—firms locate their investment projects in states that cut their corporate taxes. This effect is stronger for projects that are less geographically constrained and for projects that create more jobs. Additional analysis shows that state taxes are particularly relevant for firms’ investment location decisions among competing states. Taken together, this study offers new evidence that state corporate income taxes play an important role in firms’ interstate investment location decisions.