UC Irvine

In this study, I examine whether bank taxation “spills over” onto corporate investment. I use state bank tax rate changes as a quasi-natural experiment and measure corporate investment using the number of establishments and the number of employees of publicly traded firms in a given state in a given year. Using generalized difference-in-differences, I find evidence that bank taxes (1) reduce corporate investment in the taxing jurisdiction (direct spillover effect) and (2) increase corporate investment in non-taxing jurisdictions (indirect spillover effect). In terms of magnitude, I find that rate increases reduce employment and establishments by 8-9% and 4% respectively in the taxing jurisdiction while increasing employment and establishments by roughly 2% and 1% in non-taxing jurisdictions. Rate decreases increase employment and establishments by 2-3% in the taxing jurisdiction while decreasing employment and establishments by 3% and 1%, respectively. To provide evidence on the mechanism at play, I find results consistent with (1) bank taxes reducing lending among banks headquartered in taxing states and (2) bank taxes reducing debt financing and leverage among firms headquartered in taxing states. These results provide evidence that bank taxes affect investment by altering lending.