Tax regulations and corporate social responsibility: Evidence from the adoption of addback statutes

Different U.S. states have enacted addback statutes at various times to close tax avoidance loopholes, significantly reducing the after-tax income of companies headquartered in adopting states. Leveraging these statutes as exogenous shocks to taxable income, we investigate how changes in tax regulations affect firms’ corporate social responsibility (CSR) performance. Using a difference-in-differences approach, we find that firms in states subject to addback statutes experience a significant decline in their CSR performance scores. In cross-sectional analyses, we further show that this association is more pronounced among firms with high levels of intangibles—such as growth firms, those with significant R&D spending, and firms with a high number of patents—as well as among firms with high investment opportunities and financial constraints, which are more likely to be affected by the addback statutes. Moreover, the significant effect is evident across both CSR strengths and concerns, spans most dimensions, and is consistent across different providers of environmental, social, and governance (ESG) indicators. Overall, these findings carry important policy implications: they highlight an unintended consequence of tax regulations and reinforce the notion that increased financial burdens from taxes can limit the capital available for CSR/ESG investments.