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Coveting Thy Neighbor's Manuafacturing: the Dilemma of State Income Apportionment

29 Pages Posted: 4 Aug 2000 Last revised: 19 Sep 2012

Austan Goolsbee

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Edward L. Maydew

University of North Carolina at Chapel Hill

Multiple version iconThere are 2 versions of this paper

Date Written: June 1998

Abstract

This paper investigates the economic impact of the apportionment formulae used to divide corporate income taxes among the states. Most apportionment formulae, by including payroll, turn the state corporate income tax at least partially into a payroll tax. Using panel data from 1978 - 1994, the results show that this distortion has an important effect on state-level employment. For the average state, reducing the payroll weight from one-third to one-quarter increases manufacturing employment around 3% and the result is highly robust. The results also indicate that apportionment changes have important negative externalities on other states in that the effects of the apportionment formula on aggregate employment is zero. Every job gained within a state from an apportionment change is taken from another state. This externality suggests that the U.S. would be better off if the apportionment formula were set at a federal level. The paper also shows that because the payroll component of the tax is administered on top of the existing payroll tax, the deadweight loss from this component of state corporate income taxation may be significant, despite the low tax rates.

Suggested Citation

Goolsbee, Austan and Maydew, Edward L., Coveting Thy Neighbor's Manuafacturing: the Dilemma of State Income Apportionment (June 1998). NBER Working Paper No. w6614. Available at SSRN: https://ssrn.com/abstract=226336

Austan Goolsbee (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
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National Bureau of Economic Research (NBER)

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Edward L. Maydew

University of North Carolina at Chapel Hill ( email )

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United States
919-843-9356 (Phone)

HOME PAGE: http://www.kenan-flagler.unc.edu/faculty/directory/accounting/edward-maydew

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