Multi-jurisdictional Taxing Rights: Determinants and Implications

Abstract

Motivated by the OECD's Pillar 1 focus on a reallocation of taxing rights of residual profits to market jurisdictions, we investigate U.S. state-level determinants and implications of sales-focused taxing rights. In the past two decades, U.S. states shifted the focus of taxing rights from personnel and physical capital to the amount and location of sales. Salesfocused taxing rights typically benefit in-jurisdiction firms and increase the number of out-ofjurisdiction firms subject to taxation. Examining post 2000 data, our evidence suggests states select sales-focused taxing rights when such policies would benefit their constituents. We also find that taxing rights explain little of the variation in tax revenues but appear to play a bigger role in influencing employment and investment compared to other state tax and non-tax characteristics. Our study jointly considers multiple aspects of taxing rights over a long period and informs domestic and foreign policymakers on multi-jurisdictional taxing rights.

Keywords: state corporate income tax, apportionment, taxing rights

JEL Classification: H25, H71, H72, H73, H20, M41