UC Irvine

I study whether the adoption of state anti-patent troll laws incentivizes protected firms to be more tax aggressive. Non-practicing entities, or patent trolls, have widely been recognized as a social detriment by regulators, prompting many states in the U.S. to enact legislature designed to counteract patent trolling and spur within-state innovation. While prior studies have shown that anti-troll laws generally associate with ex-post positive outcomes (e.g., increased innovation), I predict and find that the adoption of anti-troll laws gives rise to a loss in state tax revenues by firms exploiting the resulting increase in intellectual property (IP) to shift profits to lower-tax jurisdictions. Specifically, following the passage of anti-troll laws, 1) firms operating in adopting states report lower state effective tax rates and assign significantly more patents to tax havens, and 2) adopting states experience lower corporate income tax revenue growth. Economically, my results suggest that firms operating in anti-troll states lower state tax burdens by 19 percent relative to unprotected firms on average. I also find that U.S. multinationals operating in anti-troll states engage in more tax-motivated outbound income shifting. My study is the first to provide evidence that state legislators’ efforts to protect local firms from patent trolls could have unintended negative state tax revenue consequences.