What Predicts State Business Tax Revenue? The Role of Interest Group Influence

Lowering state-level business taxes has been shown to have no effect on the state economy. Yet while some states maintain high business taxes, others collect next-to- nothing. If there are no negative economic consequences to high business taxes and they cost less to the median voter, why does such variation across states exist? Existing theory has focused on the composition of legislative bodies or ‘race to the bottom’ competitive pressures from neighboring states; we introduce an additional explanation based on local interest group influence. Using an expanded 28-year database with plausibly exogenous regulatory variation, we find that the ability for interest groups to spend in state elections predicts business tax levels. This influence can work in either direction: we find that union expenditure bans increase state business tax revenue, while corporate expenditure bans decrease it.