Two Indiana-Bloomington faculty are presenting papers today at the final Indiana Tax Policy Workshop of the semester:
David Gamage, Tax Cannibalization and State Government Tax Incentive Programs, 82 State Tax Notes 197 (Oct. 17, 2016) (with Darien Shanske (UC-Davis)):
States and localities offer businesses an enormous amount of tax incentives to locate within their jurisdictions despite: 1) the mass of evidence that suggests that these incentives are not particularly effective and, 2) substantial doubts about their constitutionality.
In this essay, we develop a new critical perspective on state tax incentives. We argue that offering these incentives permits states to offer lower taxes to more mobile businesses while keeping their overall corporate tax rates high. This is arguably not the best choice for the states, but it is definitely not the best choice for the federal government. Because the states share the corporate income tax base with the federal government, higher overall state corporate income tax rates results in more cannibalization of federal corporate income tax revenue.
Justin Ross, The Impact of State Taxes on Pass-Through Businesses: Evidence from the 2012 Kansas Income Tax Reform (with Jason DeBacker (Middle Tennessee State), Bradley Heim (Indiana) & Shanthi Ramnath (U.S. Treasury Department, Office of Tax Analysis)):
In 2012, Kansas undertook a large-scale tax reform that excluded certain forms of business income from individual taxation. In theory, these changes enhance the incentives to undertake more real economic activity such as new business formation or increases in employment or investment. But, the reform also shifted the incentives to avoid taxation by recharacterizing income sources. This paper provides evidence of these effects using federal administrative taxpayer data in difference-in-difference models, where taxpayers in bordering states serve as a control group for Kansas residents. Drawing on these data from 2010 to 2014, we present a series of regression results in an attempt to determine the extent to which the reform impacted observed outcomes, and whether these were driven by tax avoidance or real economic activity. The evidence suggests that, at both extensive and intensive margins, the behavioral responses were overwhelmingly tax avoidance rather than real supply side responses.