Employing Synthetic Control Method to Examine Whether State Corporate Tax Rate Reductions Grow Manufacturing Employment

Abstract

This study examines the impact of reductions in Indiana's corporate income tax rate beginning in July 2012. It employs the synthetic control method to construct a counterfactual, or “synthetic Indiana,” using quarterly manufacturing employment data from 23 states that did not change their tax rates during the 2003–2018 study period. The analysis suggests that a weighted combination of Iowa (11.9%), Tennessee (69.5%), Utah (8%), and Wisconsin (10.5%) best predicts the trajectory of manufacturing employment in Indiana from 2003 to 2011 before the rate cuts. Placebo tests and exact p-value estimates are used to test the significance of the employment effects of the corporate income tax rate cuts, and a placebo-date falsification test is used as a robustness test. The test results suggest that the rate cuts did not impact manufacturing employment. Placebo-date falsification tests suggest that changes to the corporate apportionment formula from 2007 to 2011 instead positively affected manufacturing employment.

Keywords

state corporate income tax economic development manufacturing employment synthetic control

Get full access to this article

View all access options for this article.

References

Abadie

Diamond

Hainmueller

(2010). Synthetic control methods for comparative case studies: Estimating the effect of California’s tobacco control program. Journal of the American Statistical Association, 105(490), 493–505. https://doi.org/10.1198/jasa.2009.ap08746

Abadie

Diamond

Hainmueller

(2015). Comparative politics and the synthetic control method. American Journal of Political Science, 59(2), 495–510. https://doi.org/10.1111/ajps.12116

Abadie

Gardeazabal

(2003). The economic costs of conflict: A case study of the basque country. American Economic Review, 93(1), 113–132. https://doi.org/10.1257/000282803321455188

Associated Press. (2011, April 3). Corporate income tax plan hinges on budget hurdles. Indianapolis Business Journal. https://www.ibj.com/articles/26317-corporate-income-tax-plan-hinges-on-budget-hurdles

Associated Press. (2011, February 8). Lawmakers eye cutting corporate taxes. Indianapolis Business Journal. https://www.ibj.com/articles/24636-lawmakers-eye-cutting-corporate-taxes

Associated Press. (2011, January 17). Indiana senator set to propose lower corporate tax. Indianapolis Business Journal. https://www.ibj.com/articles/24636-indiana-senator-set-to-propose-lower-corporate-tax

Bartik

T. J.

(1992). The effects of state and local taxes on economic development: A review of recent research. Economic Development Quarterly, 6(1), 102–111. https://doi.org/10.1177/089124249200600110

Bonander

(2018). Compared with what? Estimating the effects of injury prevention policies using the synthetic control method. Injury Prevention, 24(Supplement 1), i60–i66. https://doi.org/10.1136/injuryprev-2017-042360

Bundrick

Yuan

(2019). Do targeted business subsidies improve income and reduce poverty? A synthetic control approach. Economic Development Quarterly, 33(4), 351–375. https://doi.org/10.1177/0891242419875502

10.

Castillo

Figal Garone

Maffioli

Salazar

(2017). The causal effects of regional industrial policies on employment: A synthetic control approach. Regional Science and Urban Economics, 67, 25–41. https://doi.org/10.1016/j.regsciurbeco.2017.08.003

11.

Cordero

(2014, March 26). Pence signs business tax cut legislation into law. TheStateHouseFile.com. https://www.thestatehousefile.com/articles/pence-signs-business-tax-cut-legislation-into-law

12.

Covington

(2014, January 9). Senate bill seeks to cut corporate income and property taxes. Indianapolis Business Journal. https://www.ibj.com/articles/45321-senate-bill-seeks-to-cut-corporate-income-and-property-taxes

13.

Crosby

A. W.

Merriman

D. F.

(2016). What happened to Illinois’ economy following the January 2011 tax increases? A midwestern comparison. Journal of Regional Analysis and Policy, 46(1100-2016-90020), 39–51.

14.

Ferman

Pinto

(2019). Inference in differences-in-differences with few treated groups and heteroskedasticity. The Review of Economics and Statistics, 101(3), 452–467. https://doi.org/10.1162/rest_a_00759

15.

Gius

(2019). Using the synthetic control method to determine the effect of ultrasound laws on state-level abortion rates. Atlantic Economic Journal, 47(2), 205–215. https://doi.org/10.1007/s11293-019-09619-4

16.

Goolsbee

Maydew

E. L.

(2000). Coveting thy neighbor’s manufacturing: The dilemma of state income apportionment. Journal of Public Economics, 75(1), 125–143. https://doi.org/10.1016/S0047-2727(99)00036-5

17.

Grier

Maynard

(2016). The economic consequences of Hugo Chavez: A synthetic control analysis. Journal of Economic Behavior & Organization, 125, 1–21. https://doi.org/10.1016/j.jebo.2015.12.011

18.

Gupta

Hofmann

M. A.

(2003). The effect of state income tax apportionment and tax incentives on new capital expenditures. Journal of the American Taxation Association, 25(s-1), 1–25. https://doi.org/10.2308/jata.2003.25.s-1.1

19.

Gupta

Moore

Gramlich

Hofmann

M. A.

(2009). Empirical evidence on the revenue effects of state corporate income tax policies. National Tax Journal, 62(2), 237–267. https://doi.org/10.17310/ntj.2009.2.03

20.

Helms

L. J.

(1985). The effect of state and local taxes on economic growth: A time series–cross section approach. The Review of Economics and Statistics, 67(4), 574–582. https://doi.org/10.2307/1924801

21.

Jorosz

(2010, December 15). Indiana lawmakers plan to float corporate tax cuts. Indianapolis Business Journal. https://www.ibj.com/articles/24009-indiana-lawmakers-plan-to-float-corporate-tax-cuts

22.

King

Zeng

(2006). The dangers of extreme counterfactuals. Political Analysis, 14(2), 131–159. https://doi.org/10.1093/pan/mpj004

23.

Kolko

Neumark

Mejia

M. C.

(2013). What do business climate indexes teach us about state policy and economic growth? Journal of Regional Science, 53(2), 220–255. https://doi.org/10.1111/j.1467-9787.2012.00782.x

24.

Langdon

Lehrman

(2012, May 1). The benefits of manufacturing jobs (ESA Issue Brief no. 01-12). Economics and Statistics Administration, U.S. Department of Commerce.

25.

Ljungqvist

Smolyansky

(2016). To cut or not to cut. On the impact of corporate taxes on employment and income (No. w20753). National Bureau of Economic Research, December 2014.

26.

Mazerov

(2003). Closing three common corporate income tax loopholes could raise additional revenue for many states. Center for Budget and Policy Priorities, May 23, 2003.

27.

McLure

(1980). The state corporate income tax: Lambs in wolves’ clothing? In Aaron

H. J.

Boskin

M. J.

(Eds.), The economics of taxation (pp. 327–344). Brookings Institution.

28.

Merriman

(2015). A replication of “coveting thy neighbor’s manufacturing: The dilemma of state income apportionment. Public Finance Review, 43(2), 185–205. https://doi.org/10.1177/1091142114537892

29.

Monte

Redding

S. J.

Rossi-Hansberg

(2018). Commuting, migration, and local employment elasticities. American Economic Review, 108(12), 3855–3890. https://doi.org/10.1257/aer.20151507

30.

Munasib

Rickman

D. S.

(2015). Regional economic impacts of the shale gas and tight oil boom: A synthetic control analysis. Regional Science and Urban Economics, 50, 1–17. https://doi.org/10.1016/j.regsciurbeco.2014.10.006

31.

Northeast Indiana Regional Partnership. (2011, May 11). Governor signs legislation to lower Indiana’s corporate tax rate to 6.5 percent. Northeast Indiana Regional Partnership. https://neindiana.com/news/governor-signs-legislation-to-lower-indianas-corporate-tax-rate-to-6-5-percent

32.

O’Neill

D. G.

Wiehe

(2017). Combined reporting of state corporate income taxes: A primer. Institute on Taxation and Economic Policy, February 2017.

33.

Pjesky

(2016). The impact of state corporate tax rate changes on state economic performance. Southwestern Economic Review, 43(1), 103–115.

34.

Scavette

(2023). The impact of New Jersey’s urban enterprise zones on local employment: A synthetic control approach. Economic Development Quarterly, 37(2), 127–142. https://doi.org/10.1177/08912424231158051

35.

Shuai

Chmura

(2013). The effect of state corporate income tax rate cuts on job creation. Business Economics, 48(3), 183–193. https://doi.org/10.1057/be.2013.21

36.

U.S. Bureau of Labor Statistics. (2024). Current Employment Statistics, State and Metro Area. U.S. Department of Labor. https://www.bls.gov/sae/

37.

U.S. Census Bureau. (2020a). Annual Survey of State and Local Government Finances: 2020. U.S. Department of Commerce. https://www.census.gov/programs-surveys/gov-finances.html

38.

U.S. Census Bureau. (2020b). County Business Patterns: 2020 (CBP-20). U.S. Department of Commerce. https://www.census.gov/programs-surveys/cbp.html

39.

Walczak

(2019). Throwback and throwout rules: A primer (No.662). Tax Foundation, July 2019.

40.

Wasylenko

M. J.

(1997). Taxation and economic development: The state of the economic literature. New England Economic Review, 1997, 37–52.

Supplementary Material

Please find the following supplemental material available below.

For Open Access articles published under a Creative Commons License, all supplemental material carries the same license as the article it is associated with.

For non-Open Access articles published, all supplemental material carries a non-exclusive license, and permission requests for re-use of supplemental material or any part of supplemental material shall be sent directly to the copyright owner as specified in the copyright notice associated with the article.

0.00 MB

4.27 MB