Coveting thy neighbor's manufacturing: the dilemma of state income apportionment

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 1.1%, concentrated in durable goods manufacturing and with larger effects in the long-run. The results also suggest that apportionment changes have important negative externalities on other states. On average, the aggregate effects of apportionment formula changes are close to zero. (C) 2000 Elsevier Science S.A. All rights reserved.