Do State Tax Changes Affect Corporate Tax Aggressiveness? U.S. Evidence

• In Event: Tax Planning and Litigation Risk

Abstract

In this study, we empirically investigate how the U.S. state tax laws affect corporate tax aggressiveness. Utilizing a difference-in-differences method, we investigate the effect of staggered changes in state corporate income tax rates in the U.S. on corporate tax aggressiveness. We find that firms become more aggressive in avoiding taxes following state tax increases but are insensitive to tax cuts. Further, the effect of state tax increases on tax aggressiveness is weaker for firms with greater debt tax shields and marginal tax rates. Finally, we show that firms are more likely to shift their operations and headquarters out of states experiencing tax increases.

Author

• Hao Shen, Illinois Institute of Technology