Race to the Bottom? Local Tax Break Competition and Business Location
American Economic Journal: Applied Economics 12(1): 288-317
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.
American Economic Association
ECONOMIC DEVELOPMENT; Regional policy and planning; Business and tax incentives
Mast, Evan. 2020. "Race to the Bottom? Local Tax Break Competition and Business Location." American Economic Journal: Applied Economics 12(1): 288-317. https://doi.org/10.1257/app.20170511