Lessons for International Tax Reform from the U.S. State Experience under Formulary Apportionment

42 Pages Posted: 26 Nov 2013 Last revised: 25 Sep 2018

See all articles by Kimberly A. Clausing

Kimberly A. Clausing

Reed College - Department of Economics; UCLA School of Law

Date Written: June 29, 2014


This work undertakes a comprehensive analysis of the U.S. state experience under formulary apportionment of corporate income. While formulary apportionment eliminates the possibility of shifting income across states through accounting strategies that manipulate where income is booked, it may heighten the tax responsiveness of formula factors. The present analysis uses the substantial variation in corporate tax policy decisions of U.S. states over the period 1986 to 2012 to better understand the consequences of formulary apportionment. It examines the effects of policy choices regarding tax rates, formula weights, and other parameters on economic activity, estimating the tax sensitivity of employment, investment, and sales. With the inclusion of adequate control variables, results indicate that economic activity is not particularly sensitive to U.S. state corporate tax policy choices, especially in recent years. Still, tax policy choices have important effects on corporate tax revenues. These results suggest important lessons regarding possible international adoption of formulary apportionment.

Keywords: corporate income taxation, corporate income tax revenues, tax competition, formulary apportionment, international taxation, unitary taxation, income shifting, state taxation, multinational corporations

JEL Classification: H25, H87

Suggested Citation

Clausing, Kimberly A., Lessons for International Tax Reform from the U.S. State Experience under Formulary Apportionment (June 29, 2014). Available at SSRN: https://ssrn.com/abstract=2359724 or http://dx.doi.org/10.2139/ssrn.2359724

Kimberly A. Clausing (Contact Author)

Reed College - Department of Economics ( email )

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