The Relationship between Legal Status, Location, and Business Tax Preference: The Case of Kansas

Abstract

The literature on business responses to state taxes traditionally holds businesses respond to tax differences through plant relocation and expansion planning. This literature is silent on the tradeoffs that businesses would make to a state’s tax policy, if they could adjust the taxes to suit their own preferences and legal status. This research addresses the question of what tradeoffs businesses would make in tax policy by utilizing the budgetary tradeoff methodology developed in the political science and political economy literature. As predicted by theory, firms responded to a survey by the Kansas Department of Commerce that they would minimize the taxes that they have to pay but differences exist among different types of businesses, particularly out of state businesses. Kansas is an interesting case given the state’s first-of-its-kind removal of taxes on pass through corporations. This case shows that the tax tradeoff theory is useful for analyzing the characteristics of firms’ tradeoff choices.