Firm-Level Effects of Apportionment Formula Changes

• FRC Report 74 Version
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• October 1, 2002 Create Date
• February 13, 2020 Last Updated

FRC Report 74, October 01, 2002, Kelly D. Edmiston, F. Javier Arze

The corporate income tax has made a remarkable decline in its importance to state revenue coffers over the last 20 years. In the late 1970s, corporate income taxes contributed over 10 percent of total state tax collections, but today the corporate tax share is about 6 percent, despite relatively little change in tax rates. In Georgia, the corporate tax share fell from 9.2 percent to 5.3 percent over that period. Part of this trend can be explained by changes in federal corporate income tax policy, but corporate tax collections also have responded to a myriad of state corporate tax policy changes designed to stimulate business investment and job creation in an increasingly competitive economic development environment. One tax-based economic development policy that has received an especially great deal of attention in state legislatures and the academic literature in recent years is the modification of apportionment formulae used to allocate the taxable income of multistate corporations across the states in which they do business.

The formulary apportionment method allocates a firm's profit to each state based on the relative distribution of the firms' total sales, payroll, and property in that state. Although traditionally states have given each of these factors equal weight (1/3) in the apportionment formula, a significant trend in recent years has been to place a heavier weight on the sales factor (and therefore uniformly lower weights on payroll and property). Georgia changed its apportionment formula from an equally weighted three-factor formula to a double-weighted sales formula in 1995. This policy is intended not only to stimulate economic development, but also to export part of the corporate tax burden out of the state by providing favorable tax treatment to firms that produce in-state but sell out-of-state.

Of the 47 states (including the District of Columbia) that currently impose a corporate income tax, a large majority now weight the sales factor more heavily than the payroll and property factors. The most common formula places a double-weight on the sales factor, although several states now employ a single-factor sales formula (100 percent weight on sales). Other states offer optional formulas with greater sales factor weights. In most states, the shift away from uniformly weighted apportionment formulas was made in the 1990s, which reflects the increasingly competitive nature of taxation and economic development across the states.