Altered States: Taxes and the Location of Foreign Direct Investment in America

James R. Hines Jr., University of Michigan Law School

Reproduced with permission.


This paper compares the distribution between U.S. states of investment from countries that grant foreign tax credits with investment from all other countries. The ability to apply foreign tax credits against home-country tax liabilities reduces an investor's incentive to avoid high-tax foreign locations. State corporate tax rate differences of 1 percent are associated with differences of 9-11 percent between the investment shares of foreign-tax-credit investors and the investment shares of all others, suggesting that state taxes significantly influence the pattern of foreign direct investment in the United States. (JEL H87, H73, H25, F23)