Using census microdata on multistate firms and their organizational forms, we estimate the impact of state taxes on business activity. For C corporations, employment and the number of establishments have short-run corporate tax elasticities of −0.4 to −0.5 and do not vary with changes in personal tax rates. Pass-through entity activities show tax elasticities of −0.2 to −0.4 with respect to personal tax rates and are invariant with respect to corporate tax rates. Capital shows similar patterns. Reallocation of productive resources to other states drives around half the effect. The responses are strongest for firms in tradable and footloose industries.

Using confidential establishment-level data from the US Census Bureau’s Longitudinal Business Database, this paper documents how local shocks propagate across US regions through firms’ internal networks of establishments. Consistent with a model of optimal within-firm resource allocation, we find that establishment-level employment is sensitive to shocks in distant regions in which the establishment’s parent firm is operating, and that the elasticity with respect to such shocks increases with the firm’s financial constraint. At the aggregate regional level, we find that aggregate county-level employment is sensitive to shocks in distant counties linked through firms’ internal networks.

How do different bankruptcy approaches affect the local economy? Using US Census microdata, we explore the spillover effects of reorganization and liquidation on geographically proximate firms. We exploit the random assignment of bankruptcy judges as a source of exogenous variation in the probability of liquidation. We find that employment declines substantially in the immediate neighborhood of the liquidated establishments, relative to reorganized establishments. The spillover effects are highly localized and concentrate in nontradable and service sectors, consistent with a reduction in local consumer traffic and a decline in knowledge spillovers between firms. The evidence highlights the externalities that bankruptcy design can impose on nonbankrupt firms.