"The Static, Dynamic, and Distributional Effects of State Business Tax Cuts: Evidence from Kansas"

This paper estimates the static, dynamic, and distributional effects of cutting state business taxes. Analyzing data from the population of U.S. business tax filings linked to their workers and owners, we compare the outcomes of firms to those of similar firms in other states. We begin with the case of Kansas, which experienced a historic state tax elimination in 2013 and reversal in 2017. We then generalize the results by looking at other state pass-through and C-corporate tax reforms. We present five main findings. First, consistent with prior work, we find no evidence the Kansas tax cut induced meaningful growth in wage bills, sales, entry, pre-tax profits, or investment. Second, the mechanical effects were much larger than the dynamic growth effects, implying a substantial reduction in revenues and increase in after-tax income inequality. Third, the behavioral responses we do observe indicate that combining the mechanical, static, and dynamic responses leads to an even more unequal distribution of benefits from the reform. Fourth, we find similar estimates when broadening our scope to a pooled analysis of six additional pass-through tax reforms, which also enable us to estimate limited long-term responses. Finally, we find evidence of heterogeneous effects for C-corporate reforms relative to pass-through reforms, suggesting a larger burden that falls more on the top decile of workers.

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