City Business Taxes and Retail Firm Relocation Decisions

Abstract

There is very little literature on the impact of city taxes on firm relocation decisions. Using an ordered probit econometric model of selection, a national sample of U.S. retail establishments, and data on the existence of city business taxes for the largest 800 cities, I find that establishments are less likely to move to cities with a city business tax, and are more likely to move from cities having such a tax. Specifically, after controlling for other factors, I find that establishments are 30.4 percent less likely to move to a city having a city business tax, and are 22.5 percent more likely to move out of a city having such a tax. The results are consistent across econometric models. The paper contributes to the general literature on firm relocations, and to the literature on the impacts of local taxes. Future research on the impact of city taxes on the relocation decisions of other types of firms is called for.