Search

We apply border discontinuity analysis to measure the impact of marginal tax rates on capital income, property, sales, and income on establishment entry on either side of state borders. Establishments are more likely to enter on the side of the border with the lower marginal tax rates. The biggest differences in start-up rates are at borders with the largest tax rate differences, with property tax rate differences mattering most. We rank borders by the differences in start-ups due to tax structure, and we rank states by their distortionary tax structures. The greatest distortion in start-ups due to tax rates is at the Wyoming-Idaho border with an 8.6% lower probability of start-ups on the Idaho side. The most distortionary tax structure is Rhode Island's at 14.2% lower probability of entry, but it is not as heavily disadvantaged at the border because its neighbor, Connecticut, has the third most distortionary tax structure. Plain English Summary: State tax rates affect start-ups at state borders. State taxes on property, sales, personal income, and corporate income affect the side of the border start-ups tend to select. A state with a one-point higher tax rate in each of the four taxes will have a 3.2% lower probability of a start-up than its neighboring state. Property taxes have the greatest adverse effect on start-ups because new firms must pay property taxes, even if they have no sales or income. The greatest distortion in start-ups due to tax rates is Wyoming's 8.6% advantage compared to Idaho. Some states with the most distortionary tax structures are not disadvantaged at their borders because their neighbors also have high tax rates. Rhode Island has the most distortionary tax structure, but it is not as heavily disadvantaged at the border because its neighbor, Connecticut, has the third most distortionary tax structure. [ABSTRACT FROM AUTHOR]