Do Companies Run from Taxes?

May 3, 2005

Do taxes matter when companies decide where to locate? In theory, yes. After all taxes are just another cost of doing business, and companies streamline whenever possible.

But in practice many factors affect location decisions — labor poor, access to shipping routes, real estate prices, etc. — and taxes are just one. How much do taxes matter compared to other factors?

The answer: a lot.

Until recently, many studies found little impact of taxes because good data is hard to find on such a complex issue. But using a rare data set from a unique fiscal experiment in 1860s Netherlands, a recent paper in the Journal of Law and Economics found taxes had a surprisingly dramatic impact in the development of the newspaper industry there:

“[F]iscal policy has a direct impact on business location decisions of firms, production, competition, and the structure of markets. Taxes levied on the costs of production lower the profitability of firms, discourage markets from growing, dampen competition, and suppress the development of new industries. …Fiscal incentives thus matter for business location choices. But perhaps more vital is the fact that thriving policy endears a town to people who are positively inclined toward working for future wealth.”

One of the Tax Foundation’s most popular studies is our State Business Tax Climate Index which attempts to quantify which U.S. states have business-friendly tax policies. Check out the op-ed we put together on it last year.

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