Did FIN 48 Arrest the Trend in Multistate Tax Aggressiveness?

Abstract

We examine whether state corporate effective tax rates (ETRs) that began trending downward in the 1990s rose in response to FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes. We find state ETRs increase substantially in 2006 through 2008 for tax aggressive firms. Firm-level cash tax payments also increased over the 2005 through 2008 time period, controlling for federal and foreign ETR changes. Finally, state-level tax collections increased in 2006 and 2007. Consistent with analytic and behavioral theory, our results suggest that FIN 48 helped arrest the trend in multistate tax aggressiveness.

Keywords: state taxation, tax reserves, tax aggressiveness, ASC 740-10-25, FIN 48, uncertain tax benefits

JEL Classification: H25, H26, M41