Research finds that companies locate headquarters in states with lower corporate income taxes

In our report ‘The State of Minnesota’s Economy: 2020,’ we noted that:

Research has found that corporate income taxes have a large negative effect on aggregate investment and entrepreneurial activity, are a major influence on foreign investment decisions, reduce entrepreneurship, significantly influence firm and household location, and may also uniquely harm entrants over incumbent firms.

A new study adds to this body of evidence on the harmful effects of high rates of corporate income tax.

In a new paper titled ‘The Influence of Corporate Income Taxes on Investment Location: Evidence from Corporate Headquarters Relocations,’ economists Travis Chow, Sterling Huang, Kenneth J. Klassen and Jeffrey Ng examine “the effects of jurisdictions’ corporate taxes and other policies on firms’ headquarters (HQ) location decisions” using “changes in state corporate income tax rates across time and states as the setting.”

This is a promising approach. Relocating a headquarters is a decision that generally holds the level of investment constant. In other words, relocation does not greatly affect the level of investment, because a firm had headquarters before relocation and will have headquarters after relocation. Other corporate investments (e.g., cross‐​border acquisitions and foreign direct investment) often conflate changes in both investment levels and location. Studying the movement of headquarters allows us to largely separate the effect of choice of investment location from the level of investment.

Using a sample of relocating and non-relocating firms between 1998 and 2018, the authors establish a strong and robust positive relationship between state corporate tax rate changes and the likelihood of headquarters relocation after including extensive controls for other income ​tax‐​related, economic, and political factors at the firm and state levels. Economically, the effect is significant: the authors:

…find that a one-percentage-point increase in the HQ state corporate income tax rate increases the likelihood of firms relocating their HQ out of the state by 16.8%, and an equivalent decrease in the HQ state rate decreases the likelihood of HQ relocations by 9.1%

As of 2020, Minnesota was officially home to 16 Fortune 500 companies. In 2019, the Star Tribune asked: ‘Why do so many Fortune 500 companies call Minnesota home?‘ This is worth asking considering how high our state’s corporate income tax rates are: doesn’t this disprove the notion that taxes drive the location decisions of corporate headquarters? No. Simply put, one data point does not disprove a robust finding derived from lots of data points.