The Effect of State Income Tax Apportionment and Tax Incentives on New Capital Expenditures

Document Type

Article

Publication Date

1-1-2003

Keywords

Apportionment formula, State taxation, Tax incentives, Throwback rule, Unitary business principle

Abstract

© 2016 American Accounting Association. All rights reserved. This study examines how variations in states’ corporate income tax regimes affect new capital investment by business. Using U.S. state-aggregated data from 1983 to 1996, we find in pooled and fixed-effects regressions that new capital expenditures by corporations in the manufacturing sector are decreasing in the income tax burden on property (measured as the product of the statutory tax rate and the property factor weight), and increasing at a decreasing rate in investment-related tax incentives. The effect of the income tax burden on property is more pronounced for states mandating unitary taxation or the throwback rule. Triangulating our empirical findings with prior analytical and simulation studies suggests the following hierarchy for the relative importance of major attributes of state corporate income tax regimes: the unitary or throwback requirement is most influential on incremental capital investment, followed by apportionment weights and tax rates, and, finally, investment-related incentives.

Journal Title

Journal of the American Taxation Association

Volume

25

First Page

1

Last Page

25

DOI

10.2308/jata.2003.25.s-1.1

First Department

School of Business Administration

Link to Full Text

@ the James White Library

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