Employing Synthetic Control Method to Examine Whether State Corporate Tax Rate Reductions Grow Manufacturing Employment

This study examines the impact of reductions in Indiana’s corporate income tax rate beginning in July 2012. It employs the synthetic control method to construct a counterfactual, or “synthetic Indiana,” using quarterly manufacturing employment data from 23 states that did not change their tax rates during the 2003–2018 study period. The analysis suggests that a weighted combination of Iowa (11.9%), Tennessee (69.5%), Utah (8%), and Wisconsin (10.5%) best predicts the trajectory of manufacturing employment in Indiana from 2003 to 2011 before the rate cuts. Placebo tests and exact p-value estimates are used to test the significance of the employment effects of the corporate income tax rate cuts, and a placebo-date falsification test is used as a robustness test. The test results suggest that the rate cuts did not impact manufacturing employment. Placebo-date falsification tests suggest that changes to the corporate apportionment formula from 2007 to 2011 instead positively affected manufacturing employment.