A regional diffusion theory explanation for states’ proposal and adoption of anti-passive investment company laws

We investigate the propensity of states to propose and adopt laws prohibiting the deduction of intercompany interest or royalties in response to the passive investment company tax minimization strategy (anti-PIC statutes). Using event history analysis with panel data from 1991–2005, we investigate whether regional diffusion theory explains the proposal and adoption of anti-PIC statutes. Our results provide support for the regional diffusion theory explanation, in that both proposing and adopting states have a higher proportion of adopting states in their particular Bureau of Economic Analysis (BEA) region. We find no relationship between decreases in states’ real corporate income tax revenues and their adoption of anti-PIC statutes, but do find that proposals are more common in states with slower growth in real personal income. This study contributes to existing state and local tax policy research by demonstrating that certain types of policy decisions may arise from reasons closely linked to herding behavior.