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

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  • Evan Mast

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.

Suggested Citation

  • Evan Mast, 2020. "Race to the Bottom? Local Tax Break Competition and Business Location," American Economic Journal: Applied Economics, American Economic Association, vol. 12(1), pages 288-317, January.
    • Handle: RePEc:aea:aejapp:v:12:y:2020:i:1:p:288-317
    DOI: 10.1257/app.20170511
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    Cited by:

    1. Raphael Calel & Jonathan Colmer & Antoine Dechezleprêtre & Matthieu Glachant, 2025. "Do Carbon Offsets Offset Carbon?," American Economic Journal: Applied Economics, American Economic Association, vol. 17(1), pages 1-40, January.
    2. Cameron LAPOINT & SAKABE Shogo, 2021. "Place-Based Policies and the Geography of Corporate Investment," Discussion papers 21059, Research Institute of Economy, Trade and Industry (RIETI).
    3. David R. Agrawal, 2021. "The Internet as a Tax Haven?," American Economic Journal: Economic Policy, American Economic Association, vol. 13(4), pages 1-35, November.
    4. Dong, Qingkai & Raghunandan, Aneesh & Rajgopal, Shivaram, 2024. "When do firms deliver on the jobs they promise in return for state aid?," LSE Research Online Documents on Economics 120058, London School of Economics and Political Science, LSE Library.
    5. Li, Lixing & Liu, Kevin Zhengcheng & Nie, Zhuo & Xi, Tianyang, 2021. "Evading by any means? VAT enforcement and payroll tax evasion in China," Journal of Economic Behavior & Organization, Elsevier, vol. 185(C), pages 770-784.
    6. Sixia Chen & Yuan Fang & Shengfeng Lu & Haotian Zhang, 2024. "Tackle spurious invoices challenges to VAT compliance: a quasi-experiment of input VAT deduction reform in China," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(5), pages 1342-1387, October.
    7. Janeba, Eckhard & Schjelderup, Guttorm, 2023. "The global minimum tax raises more revenues than you think, or much less," Journal of International Economics, Elsevier, vol. 145(C).
    8. Felipe Livert & Cecilia Osorio & Jose Acuña, 2022. "Does reducing municipal taxes work to increase revenue and reduce inequality at the metropolitan level? Evidence from Santiago de Chile," Regional Science Policy & Practice, Wiley Blackwell, vol. 14(6), pages 322-343, December.
    9. Aneesh Raghunandan, 2024. "Government Subsidies and Corporate Misconduct," Journal of Accounting Research, Wiley Blackwell, vol. 62(4), pages 1449-1496, September.
    10. Ferraresi, Massimiliano, 2023. "JUE Insight: Immigrants, social transfers for education, and spatial interactions," Journal of Urban Economics, Elsevier, vol. 136(C).
    11. Qingkai Dong & Aneesh Raghunandan & Shivaram Rajgopal, 2024. "When do firms deliver on the jobs they promise in return for state aid?," Review of Accounting Studies, Springer, vol. 29(4), pages 3633-3678, December.
    12. Ferrari, Alessandro & Ossa, Ralph, 2023. "A quantitative analysis of subsidy competition in the U.S," Journal of Public Economics, Elsevier, vol. 224(C).
    13. Kim, Donghyuk, 2020. "Economic Spillovers and Political Values in Government Competition for Firms," ISU General Staff Papers 202009280700001111, Iowa State University, Department of Economics.
    14. Dow, James & Han, Jungsuk & Sangiorgi, Francesco, 2024. "The short-termism trap: Catering to informed investors with limited horizons," Journal of Financial Economics, Elsevier, vol. 159(C).
    15. Kim, Donghyuk, 2023. "Economic spillovers and political payoffs in government competition for firms: Evidence from the Kansas City Border War," Journal of Public Economics, Elsevier, vol. 224(C).
    16. Adam Scavette, 2024. "Aerospace Place-Based Policy: The Impact of Boeing on South Carolina's Aerospace Industry," Economic Development Quarterly, , vol. 38(4), pages 302-315, November.
    17. Heath Milsom, Luke & Roland, Isabelle, 2021. "Minimum wages and the China syndrome: causal evidence from US local labor markets," LSE Research Online Documents on Economics 113850, London School of Economics and Political Science, LSE Library.
    18. M. Martin Boyer & Philippe d'Astous, 2023. "Tax compliance and firm response to electronic sales monitoring," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(4), pages 1430-1468, November.
    19. Andreas Baur & Clemens Fuest & David Gstrein & Philipp Heil & Niklas Potrafke & Aurel Rochell, 2023. "The Impact of the U.S. Inflation Reduction Act (IRA) on the German Economy," ifo Forschungsberichte, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 137, July.

    More about this item

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • R32 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other Spatial Production and Pricing Analysis

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    1. Race to the Bottom? Local Tax Break Competition and Business Location (American Economic Journal: Applied Economics 2020) in ReplicationWiki

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