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Regional Diffusion Theory and the Adoption of Anti-PIC Statutes
Amy M. Hageman,
University of Central Florida
Sean Robb, University of Central Florida
ABSTRACT. This study investigates separate return states’ enactment of laws prohibiting the deduction of intercompany interest or royalties in response to the passive investment company tax minimization strategy (anti-PIC statutes). We use panel data on states’ proposals and adoptions of anti-PIC statutes from 1991-2005 to test whether regional diffusion theory explains states’ policy actions, while controlling for other variables. The results provide partial support for the fixed-region diffusion model, in that adopting states have a higher proportion of previously adopting states in their particular Bureau of Economic Analysis region. However, no relationship is found between decreases in states’ real corporate income tax revenues and their subsequent adoption of anti-PIC statutes. Overall, this study contributes to the state and local tax policy research by demonstrating that certain types of policy adoptions may arise due to regional diffusion rather than strategic tax competition.
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