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The Effect of State Income Tax Apportionment and Tax Incentives on New Capital Expenditures

26 Pages Posted: 17 Jul 2001 Last revised: 4 Oct 2010

Sanjay Gupta

Michigan State University - Eli Broad College of Business

Mary Ann Hofmann

Appalachian State University

Date Written: May 1, 2003

Abstract

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.

Keywords: State taxation, Apportionment formula, Tax incentives, Unitary business principle, Throwback rule

JEL Classification: H20, H71

Suggested Citation

Gupta, Sanjay and Hofmann, Mary Ann, The Effect of State Income Tax Apportionment and Tax Incentives on New Capital Expenditures (May 1, 2003). Journal of American Taxation Association, Vol. 25, No. Supplement, 2003. Available at SSRN: https://ssrn.com/abstract=276268 or http://dx.doi.org/10.2139/ssrn.276268

Sanjay Gupta

Michigan State University - Eli Broad College of Business ( email )

632 Bogue Street, 520 BCC
East Lansing, MI 48824
United States
517-432-6488 (Phone)

HOME PAGE: http://www.broad.msu.edu/

Mary Ann Ann Hofmann (Contact Author)

Appalachian State University ( email )

Walker College of Business
Boone, NC 28608-2037
United States
828-262-6228 (Phone)

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