Do state tax changes affect corporate tax aggressiveness? US evidence

Abstract

Purpose The purpose of this paper is to empirically explore whether and to what extent the changes in state corporate income tax rates affect corporate tax aggressiveness. Design/methodology/approach Using a differences-in-differences approach with dynamic treatment, the authors investigate the effect of staggered changes in state corporate income tax rates in the USA on corporate tax aggressiveness. Findings Firms become more aggressive in avoiding taxes following state tax increases but are insensitive to tax cuts. The effect of state tax increases on tax aggressiveness is weaker for firms with greater debt tax shields and marginal tax rates. Firms are more likely to shift their operations and relocate their headquarters out of states experiencing tax increases. Originality/value To the best of the authors' knowledge, this paper is the first to study the relation between state tax policy changes and corporate tax aggressiveness. This paper finds an asymmetrical pattern of corporate tax aggressiveness in response to state tax changes.