Tax exemptions for dependents are a subsidy to having children and therefore create
incentives for fertility. This article explores the relationship between the changing
tax value of the state exemption for dependents—combined with the federal exemption—and the observed fertility choices of married couples. Using data from the
Panel Study on Income Dynamics (PSID), the article finds that the federal exemption
does have a positive impact on differential period fertility for the sample of 229
married couples in this study. This effect is dampened by an offsetting labor force
participation and marginal tax rate effect, but it does provide evidence that fiscal
policy can influence fertility. State income tax exemptions do not appear to significantly influence the fertility decisions of the sample.
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