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


Sanjay Gupta


Michigan State University - Eli Broad College of Business

Mary Ann Hofmann


Appalachian State University; Andrews University

May 1, 2003

Journal of American Taxation Association, Vol. 25, No. Supplement, 2003

Abstract:     
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.

Number of Pages in PDF File: 26

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

JEL Classification: H20, H71

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Date posted: July 17, 2001 ; Last revised: October 4, 2010

Suggested Citation

Gupta, Sanjay and Hofmann, Mary Ann, The Effect of State Income Tax Apportionment and Tax Incentives on New Capital Expenditures (May 1, 2003). Journal of American Taxation Association, Vol. 25, No. Supplement, 2003. Available at SSRN: http://ssrn.com/abstract=276268 or http://dx.doi.org/10.2139/ssrn.276268

Contact Information

Sanjay Gupta
Michigan State University - Eli Broad College of Business ( email )
Department of Accounting & Information Systems
N270 Business College Complex
East Lansing, MI 48824
United States
517-432-6488 (Phone)
HOME PAGE: http://www.bus.msu.edu/
Mary Ann Hofmann (Contact Author)
Appalachian State University ( email )
United States
Andrews University ( email )
School of Business Chan Shun Hall
Berrien Springs, MI 49104
United States
616-471-3429 (Phone)
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