Small Business Economics

, Volume 38, Issue 4, pp 375–397 | Cite as

Can state tax policies be used to promote entrepreneurial activity?

  • Donald Bruce
  • John DeskinsEmail author


Despite a recent flurry of empirical research on the effects of taxes on small business activity, state-level taxes faced by entrepreneurs have been overlooked by most of the existing literature. Using a 50-state panel of tax policy information spanning the years 1989 through 2002, our analysis reveals that state tax policies generally do not appear to have quantitatively important effects on entrepreneurial activity. When we find statistically important effects, we find that higher individual income tax rates, the existence of a state-level estate, inheritance or gift tax, and a higher weight on the sales factor in the state corporate income tax apportionment formula all slightly reduce a state’s share of the national entrepreneurial stock. Results also indicate that states with more progressive personal income tax structures and states that have more aggressive corporate income taxes through the imposition of a combined reporting requirement both tend to have slightly higher entrepreneurship rates. The composition of state tax portfolios is not found to be a significant determinant of state entrepreneurship.


State taxes Small business taxation Small business growth 

JEL Classifications

H2 H7 L26 



The authors are grateful to the US Small Business Administration, which provided a research grant for this work (Contract No. SBAHQ-04-Q-0023). The authors also thank Joseph Johnson, William Fox, Matthew Murray, Michael McKee, Jon Rork, the editor, and two anonymous referees for very helpful comments and suggestions.


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Copyright information

© Springer Science+Business Media, LLC. 2010

Authors and Affiliations

  1. 1.Center for Business and Economic Research and Department of EconomicsUniversity of TennesseeKnoxvilleUSA
  2. 2.Department of Economics and FinanceCreighton UniversityOmahaUSA

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