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Abstract
For the past fifty years, states of the American South have been competing with one
another in order to recruit businesses to locate within their borders. While previous research
has focused on assessing the short-term success of a tax-based recruitment plan, this paper addresses
an important gap in the literature by looking at the long-term consequences that such a
development policy can impose on a state’s industrial structure. By incorporating the role of
firm mobility, this paper demonstrates that at the state level, the effect of lowering the corporate
income tax on the factor intensity of a state’s manufacturing industries is theoretically ambiguous
because it is dependent on the type of firm that finds it easier to move. Using historical
data from 1957-1992 and a dynamic, partial adjustment model, this paper establishes an
empirical link between low corporate tax rates and labor-intensive manufacturing industries,
thereby suggesting that a low-tax policy is encouraging the immigration of footloose, laborintensive
firms. Moreover, the paper finds that the labor used tends to be of an unskilled (production)
nature, even as the national trend is to substitute away from unskilled labor into
skilled labor.