Interstate Tax Differentials, Tax Competition, and Tax Policy

This article discusses interstate tax differentials, tax competition and tax policy in the U.S. as of 1986. In order to assess the impact of interstate tax differentials it is important to first determine whether such differentials exist. It is often argued that, because state and local taxes are deductible from the federal income tax bases, the impact of such differences is not large. There is some truth to this argument in that the dollar difference in profits is diminished, and the variance of the tax burden variable is reduced. But if all other factors are equal the difference in net state taxes could still be the determining factor. When a firm or an individual contemplates a move from one state to another, factors other than the relative tax burdens will be considered. If profits are considered as the only motivation for business location decisions, then the two sets of factors can be distinguished, namely those which would cause the firms' revenues to vary from state to state and those which would cause their costs to vary. It is worth pointing out that factors other than taxes are found to be more important determinants than taxes of the various measures of location and migration activity and economic activity. That is, other factors are statistically significant and have larger calculated elasticities than the tax variables.