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Effects of State Taxation on Investment: Evidence from the Oil Industry

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  • Peter Maniloff
  • Jason Brown
  • Dale T. Manning

Abstract

We provide theoretical and empirical evidence that firms do not in general respond equally to changes in prices and taxes in the setting of oil well drilling in the United States. Our key theoretical contribution is that in a multi-state model, a change in output price changes both the benefit and opportunity cost of drilling, whereas a change in a state tax rate only changes the benefit of drilling in that state. Thus, a firm responds more to a change in tax than a change in price. Our econometric results support this theoretical prediction. We find that a one dollar per barrel increase in price leads to a 1 percent increase in wells drilled, but a one dollar per barrel increase in tax leads to at least an 8 percent decrease in wells drilled. These estimates correspond to elasticities of about 0.5 and -0.3, respectively. These results are robust to interstate spillovers, other state regulations, and econometric specification. They imply that using state tax rate decreases to incentivize investment may lead to losses of government revenue.

Suggested Citation

  • Peter Maniloff & Jason Brown & Dale T. Manning, 2018. "Effects of State Taxation on Investment: Evidence from the Oil Industry," Research Working Paper RWP 18-7, Federal Reserve Bank of Kansas City, revised 05 Sep 2018.
  • Handle: RePEc:fip:fedkrw:rwp18-07
    DOI: 10.18651/RWP2018-07
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    File URL: https://doi.org/10.18651/RWP2018-07
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    Cited by:

    1. Lange, Ian & Redlinger, Michael, 2019. "Effects of stricter environmental regulations on resource development," Journal of Environmental Economics and Management, Elsevier, vol. 96(C), pages 60-87.

    More about this item

    Keywords

    Severance Tax; Drilling; Supply Elasticity;

    JEL classification:

    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development

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