Title

Race to the Bottom? Local Tax Break Competition and Business Location

Authors

Evan Mast, W.E. Upjohn Institute for Employment ResearchFollow

Upjohn Author ORCID Identifier

https://orcid.org/0000-0002-0774-0664

Publication Date

2-7-2020

Source

American Economic Journal: Applied Economics 12(1): 288-317

Abstract

I analyze how competition between localities affects tax breaks and business location decisions. I first use a geographic instrument to show that spatial competition substantially increases firm-specific property tax breaks. I then use this pattern to estimate a model of localities competing for mobile firms by offering tax exemptions. Incounterfactual exercises, restricting which levels of government can offer tax breaks has little effect on equilibrium business locations but lowers total exemptions by 30 percent. This suggests that local tax break competition primarily reduces taxes for mobile firms and is unlikely to substantially affect the efficiency of business location.

DOI

10.1257/app.20170511

Publisher

American Economic Association

Subject Areas

ECONOMIC DEVELOPMENT; Regional policy and planning; Business and tax incentives