The Unexpected Role of Tax Salience in State Competition for Businesses

Competition among the states for mobile firms and the jobs and infrastructure they can bring is a well-known phenomenon. However, in recent years, a handful of states have added a mysterious new tool to their kit of incentives used in this competition. Unlike more traditional incentives, these new incentives-which this Article brands customer-based incentives\u27L-offer tax relief to a firm\u27s customers rather than directly to the firm. The puzzle underlying customer-based incentives is that tax relief provided to the firm\u27s customers would seem more difficult for the firm to capture than relief provided directly to the firm-strange, as a state\u27s primary goal is to subsidize the firm\u27s investment in the state. After examining the emergence of this new form of incentive, this Article offers a novel explanation for its use and potential for success. Specifically, the Article argues that the effects of predictable consumer biases, particularly with respect to the salience of the tax relief provided by the incentives to consumers, cause customer- based incentives to differ substantively from traditional incentives in ways that are beneficial to both firms and states. Customer-based incentives thus present an ex- ample of how taxpayer behavior can influence the substantive effects of tax provisions, even causing two provisions with the same goal to differ on the ground. Taking these behavioral effects into account provides opportunities to increase the effectiveness of tax provisions