Tax Exportation and Economic Growth in the United States: Helping or Hurting States?

(Purpose) This study empirically examines the effect of tax exportation on economic growth across U.S. states via a two-step system generalized method of moments (GMM) estimation during a 41-year period (1980-2020). (Design/methodology/approach) The two-step system generalized method of moments (GMM) was applied in order to deal with endogeneity and prevent dynamic panel bias. The two-step system GMM is more efficient and robust to autocorrelation and heteroscedasticity than the difference GMM (Findings) Home states’ tax exportation promotes economic growth but undermines neighboring states’ economic growth. An increase in home states’ tax exportation has a negative fiscal spillover effect on neighboring states’ economic growth. States’ economic growth is also driven by fiscal health, income growth, the number of employees, population growth, and the unemployment rate. Rising fiscal health, income growth, and an increase in the total number of employees foster home and neighboring states’ economic growth; thus, these factors generate positive fiscal spillover effects that can benefit neighboring states. Population growth and a climbing unemployment rate compromise home and neighboring states’ economic growth in addition to producing negative spillover that can disadvantage neighboring states. (Research implications or Originality) This study makes several theoretical and practical contributions. It applies and expands on aspects of economic growth, especially in relation to tax exportation. Subsequent research can build on this theoretical model by integrating additional variables associated with tax exportation and states’ economic growth. The current findings offer practitioners valuable information regarding the roles of tax exportation and other variables on states’ economic growth and corresponding spillover effects.