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

Author

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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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    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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