There is considerable anecdotal evidence of US companies moving from high-tax states to low-tax states, but what do the data reveal about the impact of state taxation on economic activity? This research finds that firms subject to state-level corporate taxation respond to higher corporate tax rates by closing establishments and reducing employment; those subject only to state-level personal income taxation respond similarly to individual income tax rates, though to a lesser extent. Since half of these responses are due to reallocation of business activity to lower-tax states, tax competition across states clearly plays a first-order role in corporate decision-making.
