Race to the bottom? Local tax break competition and business location∗
نویسنده
چکیده
I analyze how competition between localities affects tax breaks and business location decisions. Using data on firm-specific property tax exemptions, I begin by documenting that spatial competition substantially increases local tax breaks. To do so, I exploit variation in the number of counties near a town, which is correlated with competition but uncorrelated with other observable town characteristics. I then use this pattern to estimate a model of localities competing for mobile firms by offering tax breaks. In counterfactual exercises, I find that policies that reduce competition between localities, such as restricting which levels of government can offer tax breaks, have very little effect on equilibrium firm locations but may lower total exemptions by up to 30%. These findings suggest that local tax break competition primarily lowers the tax rate on mobile firms and is unlikely to substantially affect the efficiency of firm location. ∗I am grateful to Liran Einav, Caroline Hoxby, Luigi Pistaferri, and Joshua Rauh for guidance and support. I also thank Jose Barrero, Nick Bloom, Tim Bresnahan, Arun Chandrasekhar, Rebecca Diamond, Mark Duggan, Matt Gentzkow, Atul Gupta, Ray Kluender, Brad Larsen, Jon Levin, and Stephen Nei for helpful discussion and comments. I received financial support from the Ric Weiland Graduate Fellowship and the E.S Shaw and B.F. Haley Fellowship. †Department of Economics, Stanford University. Email: [email protected].
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