View article

This paper examines how corporate taxation of multijurisdictional firms using formula apportionment affects the incentives faced by individual firms and individual states. Under formula apportionment, a firm's tax payments to a given state depend on its total profits nationally (or internationally) times an average of the fractions of the firm's total property, payroll, and sales located in that state. This apportionment of a firm's total profits among states, based on three separate factors, in effect creates three separate taxes, each with complicated incentive effects. A large part of our analysis is concerned with the component of the tax tied to the allocation of property. Under this tax, price distortions differ in general among firms within the same state, creating incentives for firms producing in different states to merge their operations. State tax policies are also affected by this apportionment formula: states choose inefficiently low …