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E-MailCailin Slattery is Assistant Professor of Business and Public Policy at University of California Berkeley Haas School of Business; Alisa Tazhitdinova is Assistant Professor of Economics at the University of California, Santa Barbara; and Sarah Robinson is a PhD candidate in economics at the University of California, Santa Barbara. This post is based on their recent paper.
Related research from the Program on Corporate Governance includes Corporate Political Speech: Who Decides? (discussed on the Forum here) by Lucian Bebchuk and Robert J. Jackson Jr.; The Untenable Case for Keeping Investors in the Dark (discussed on the Forum here) by Lucian Bebchuk, Robert J. Jackson Jr., James David Nelson, and Roberto Tallarita; and The Politics of CEOs (discussed on the Forum here) by Alma Cohen, Moshe Hazan, Roberto Tallarita, and David Weiss.
In January 2010, decades of legal precedent were overturned when the Supreme Court, in Citizens United v. FEC, decided that the government cannot restrict independent political expenditures by corporations, labor unions, and other associations. Critics decried the devastating impacts of independent spending by corporations. For example, the editorial board of the New York Times wrote that it “paved the way for corporations to use their vast treasuries to overwhelm elections and intimidate elected officials into doing their bidding.”
The Citizens United ruling was in fact followed by a substantial increase in independent spending. Spencer and Wood (2014) find that although spending increased in all states post-Citizens, the increase in independent expenditures was twice as large in states that restricted corporate spending before the ruling. Similarly, Petrova, Simonov and Snyder (2019) find that Citizens United led to significant increases in political advertising. The question remains whether this increase in political spending had a meaningful effect on government policies.
In this paper we study the effect of increased corporate spending in state elections on U.S. state tax rates, rules, revenues, and discretionary tax breaks. We exploit the exogenous variation in corporations’ ability to spend in elections born by the Citizens United ruling. At the time of the decision 23 states had laws that banned corporations from spending in state elections. These states now had to comply with the federal ruling, which meant that corporations were free to spend in elections where they had previously been constrained. The ruling facilitates a difference-in-differences strategy, comparing tax policy outcomes in states that were affected by the 2010 ruling to states that were not, before and after 2010. This econometric approach allows us to differentiate the effects of Citizens United ruling on tax policy from other factors that may affect state tax policies, e.g. macroeconomic conditions or political trends.
We are interested in taxes as an outcome for two reasons. First, tax revenues are an important input to a well-functioning state. Second, we think corporate influence may be particularly successful in affecting tax policy. While corporations may have neutral or offsetting preferences over social issues, tax rules (especially the corporate tax rules) have direct effects on their financial well-being, so much so that they are in the top 3 issues lobbied by companies in each year of the past decade (OpenSecrets).
Our main analysis considers multiple tax outcomes: tax rates and base rules, discretionary tax breaks, and tax revenues. We focus on three tax rates: the top corporate tax rate, top personal income tax rate and the sales tax rate. Corporations may also support changes in less salient tax rules, which can be just as financially beneficial. For this reason, we also study effects on other corporate tax features: investment tax credit, number of years allowed for loss carryforward and sales apportionment weights. Beyond explicitly changing tax policy, firms may be able to use contributions to elect or support politicians that, in return, offer them firm-specific tax breaks. For this reason, in addition to tax policy outcomes, we study the effect of the Citizens United ruling on discretionary tax breaks from 2002-2017 (Slattery, 2020). Finally, we also consider whether the Citizens United ruling led to changes in overall tax revenues.
In our difference-in-differences specification, the treatment group consists of 21 states that enacted contribution bans before 2000, and our comparison group consists of the 27 states that did not enact bans prior to 2010. In our main analysis we consider all states with bans as treated, irrespective of whether they enacted bans only on corporate expenditures or both on corporate and union expenditures. Across all outcomes, we find no statistically or economically significant effects of independent political contributions on tax outcomes. Furthermore, we are able to reject effects on tax changes that are larger in magnitude than the average tax change implemented by states during business as usual. We also find no statistically significant effect of the Citizens United ruling on the frequency or magnitude of discretionary tax breaks or other firm-specific tax incentives. Finally, we find no statistically significant effect of the increased political contributions on tax revenues overall.
We supplement our analysis on the cancellation of the independent contribution bans due to Citizens United with an equivalent event-study analysis of the ban introductions. Since ban introductions were enacted by the state legislators themselves, ban enactments are arguably less exogenous than the ban cancellations resulting from the Supreme Court ruling. Therefore, we treat this evidence as suggestive, rather than causal. Our results are consistent: once again, across outcomes and specifications, we do not detect a statistically or economically significant effects of ban enactments on tax policy outcomes.
Despite the fear that Citizens United would unleash corporate interests, our results suggest that independent corporate contributions are unlikely to drive tax policies outright. Of course, we cannot conclude that corporate political influence has no effect on other pro-business regulations. However, lower taxes, an objective that unifies corporations of all types, were not realized in the wake of the Supreme Court ruling. One reason for this could be that the companies with the most potential influence are multinational corporations that are already able to avoid most state and local tax burden. Alternatively, tax policy may not have changed as a result of Citizens United decision not because money has no effect but because the independent contribution bans did not limit corporate influence in the first place.
The complete paper is available for download here.
