Coveting Thy Neighbor's Manuafacturing: The Dilemma of State Income Apportionment

Austan Goolsbee and Edward L. Maydew

No 6614, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper investigates the economic impact of the apportionment formulae used to divide corporate income taxes among the states. Most apportionment formulae, by including payroll, turn the state corporate income tax at least partially into a payroll tax. Using panel data from 1978 - 1994, the results show that this distortion has an important effect on state-level employment. For the average state, reducing the payroll weight from one-third to one-quarter increases manufacturing employment around 3% and the result is highly robust. The results also indicate that apportionment changes have important negative externalities on other states in that the effects of the apportionment formula on aggregate employment is zero. Every job gained within a state from an apportionment change is taken from another state. This externality suggests that the U.S. would be better off if the apportionment formula were set at a federal level. The paper also shows that because the payroll component of the tax is administered on top of the existing payroll tax, the deadweight loss from this component of state corporate income taxation may be significant, despite the low tax rates.

Date: 1998-06
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Published as Journal of Public Economics, Vol. 75, no. 1 (January 2000): 125-143.

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Journal Article: Coveting thy neighbor's manufacturing: the dilemma of state income apportionment (2000)
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