The impact of interstate competition has been apparent in tax policy perceived as affecting firms’ location decisions. In legislative sessions in 1997 and each of the two previous years, at least 20 states passed legislation to reduce business taxes in some way in order to encourage economic development. In addition, nearly all states allow local officials to offer concessions reducing or eliminating local taxes. The changes in Tennessee taxes shown in the Tennessee Department Of Revenue paper Business Taxes: Current Structure And Options For Change are typical of the kinds of changes being made by most states.
Successive moves of this type suggest that taxation of footloose firms, particularly those in manufacturing, is gradually being reduced. State policies have been moving in the direction of ending: (1) sales taxes on equipment and supplies using in constructing new facilities, (2) property taxes on manufacturers’ inventories, machinery, and equipment, (3) for limited times, property taxes on new plants and expansions, and (4) corporate profit taxes associated with out-of-state sales. In addition, states are enacting special tax concessions for particular industries such as oil and gas exploration and production, processing of agricultural commodities, aircraft maintenance, banking, and insurance.