The Effect of State Income Tax Apportionment and Tax Incentives on New Capital Expenditures
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
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, H71Accepted Paper Series
Date posted: July 17, 2001 ; Last revised: October 4, 2010
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