CORVALLIS, Ore. – A new study using publicly available tax data shows that the documented decline in state corporate income tax collections over the past 20 years may be in part due to states’ efforts to try and make their policies more “business friendly.”
Jared Moore, the Mary Ellen Phillips Assistant Professor of Accounting at Oregon State University, and three co-authors analyzed data from 43 states from 1982 to 2002 to determine some of the potential causes of and remedies for the decline in state corporate income tax (SCIT) revenues.
Their research is featured in the June issue of the National Tax Journal.
Moore said that state tax revenues (when measured against economic indicators such as federal corporate taxable income, total state tax collections, or gross state product) have decreased sharply over the last two decades. He and his colleagues looked at a handful of the most common state tax policies, and studied which ones on average are significantly associated with state corporate income tax revenues.
One such policy is the apportionment formula. According to Moore, most states use an apportionment formula to allocate the total taxable income of a multi-state corporation amongst the various states in which it operates. In the past, the standard structure of this formula placed equal weight on three factors: sales within the state, property located within the state, and payroll within the state. As states have shifted their policies to try and attract new businesses, more of them have placed heavier weight on the sales factor in the apportionment formula, with some states basing the calculation entirely on sales.
Weighting the sales factor more heavily favors in-state businesses that export to out-of-state locations and in theory places a larger tax burden on out-of-state businesses that import to locations within the state, Moore said. The idea is to encourage corporations to domicile within the state, whether in terms of keeping existing businesses there or attracting new ones.
However, results of the study suggest that placing higher weight on the sales factor is associated with lower state corporate income tax revenues, Moore said, a finding that he says is not altogether surprising.
“The bottom line is that increasing the weight on the sales factor should result in lower revenues from in-state businesses because large portions of their in-state activities (i.e., property and payroll) become less ‘important’ in the apportionment formula.”
Conversely, Moore said revenues from out-of-state corporations that sell into the state should increase because what little in-state activity they have (i.e., sales) is now “more important” in the apportionment formula. While these two effects offset to some extent, many out-of-state corporations that sell product into a given state are able to escape taxation in that state altogether because they do not have “substantial nexus” there.
“While an increase in the sales factor weight should theoretically generate more revenues from out-of-state businesses, the state gets no additional revenues from many of these companies because they are not within the state’s taxing jurisdiction,” Moore said. “This phenomenon would explain, at least partially, a net reduction in state corporate income tax revenues following an increase in the sales factor weight.”
“Oregon is one of many states that have shifted their apportionment formula to focus entirely on sales, and the state expected prior to implementing the policy to lose revenue,” Moore added. “The net effect in the short-term is a reduction in revenues. The hope is that increased economic activity brought about by the policy will ultimately lead to higher corporate tax revenues. But research focusing on that longer-term perspective is sparse, so we do not really know yet whether weighting the sales factor more heavily actually succeeds in generating higher revenues over the long term.”
Moore said the researchers would like to next look at the long-term effects of apportionment formula weights and find out if there really is an eventual net revenue gain for states that weight the sales factor more heavily. This research could be useful to policy makers as they assess the extent to which such policies have their intended effects.
Sanjay Gupta of Michigan State University, Jeffrey Gramlich of the University of Southern Maine and Copenhagen Business School, and Mary Ann Hofmann of Appalachian State University are Moore’s co-authors on the study.