Previous studies have struggled to demonstrate that higher taxes deter business activity. We
revisit this issue by estimating the effect of changes over time in cross-border differences in
state tax conditions on the tendency for new establishments to favor one side of a state
border over the other. Identification is enhanced by taking account of previously overlooked
reciprocal agreements that require workers to pay income tax to their state of residence as
opposed to their state of employment. When reciprocal agreements are in force, higher …