Journal Article

State business taxes and investment: state-by-state simulations

Abstract: This article develops a framework for simulating the effects of state business taxes on state investment and output. Our simulations provide the predicted increase in investmentboth in equipment and structures (E&S) and in research and development (R&D)and the predicted increase in output for a given state resulting from a specified change in one of its three tax policiesthe E&S investment tax credit, the R&D tax credit, or the corporate income tax. The simulations depend on a set of formulas linking economic parameters and state data to investment and output, all of which are reported in this article. We report results, based on our preferred set of parameters, for each of the 48 contiguous states. We also discuss alternative parameter values and explore the resulting sensitivity of predicted changes in state investment and output. Finally, we describe a simple web tool that we have made available online (www.frbsf.org/csip/taxapp.php) that allows users to insert their own preferred parameter values and simulate the economic effects for the state and tax policy of their choosing.

Keywords: Taxation; state finances;

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Economic Review

Publication Date: 2010

Pages: 13-28