Effects of Unitary Versus Non-Unitary State Income Taxes on Interstate Resource Allocation: Some Analytical and Simulation Results

Posted: 1 Jun 2001  

Terry L. Lease

Florida Institute of Technology

Charles W. Swenson

University of Southern California - Leventhal School of Accounting

Michael Williams

affiliation not provided to SSRN

Abstract

This study examines the optimal location choice decisions of a two-state firm in response to changing state corporate income tax rates and tax structures. Because the firm can engineer its tax liability by manipulating between-state location of sales, property, and payroll, changes in relative state tax rates should result in the firm making such location changes. Results of a model firm simulation, examining various combinations of state tax rates and unitary versus non-unitary tax structures, found that the firm would make interstate resource changes to minimize company-wide state income taxes. Important findings of the study are that tax rate changes in non-unitary states may cause little or no change in resources used in that state. Indeed, in one scenario, the resulting resource flows from a tax increase are favorable to the non-unitary state, making a tax increase a win-win situation for the state government (higher tax revenue and more economic activity). In contrast, changes in unitary state tax rates can result in significant resource changes in both the unitary state and in other states. The finding that tax rate cuts are ineffective in non-unitary states implies that these states may be more successful in attracting investment by changes affecting apportionment factors (tax credits for new capital, or new jobs) or by use of non-tax incentives.

Suggested Citation

Lease, Terry L. and Swenson, Charles W. and Williams, Michael, Effects of Unitary Versus Non-Unitary State Income Taxes on Interstate Resource Allocation: Some Analytical and Simulation Results. American Taxation Association, Vol. 23, No. 1, Spring 2001. Available at SSRN: https://ssrn.com/abstract=261730

Terry L. Lease

Florida Institute of Technology

150 West University Blvd.
Melbourne, FL 32901-6975
United States

Charles W. Swenson (Contact Author)

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

Michael G. Williams

affiliation not provided to SSRN

No Address Available

Paper statistics

Abstract Views
4,879