The Diffusion of State Tax Incentives for Business

Abstract

Tax competition scholars are increasingly recognizing that states compete with each other not only by manipulating tax rates but also by adopting tax incentives. However, there is a comparative lack of empirical literature exploring why states adopt different types of tax incentives. This article draws on the literatures on tax competition and policy diffusion to develop hypotheses about what factors motivate states to adopt business tax incentives, paying particular attention to the influence of other adopting states. It uses event history analysis methods to test hypotheses regarding the adoption of four state tax incentive policies: investment tax credits, apportionment formula changes, research and development tax credits, and job creation tax credits. Regression results show that factors that influence adoption decisions are largely inconsistent across the four incentive types. However, analyses of duration dependence find evidence consistent with the idea that states are “racing to the bottom.”