Tax That Fellow Behind the Tree: The Effect of a Heavily Sales Weighted Income Tax Apportionment Factor on Tax Burdens

We investigate the impact of states’ decisions to increase the weight on sales in their income tax apportionment formula on firms’ state income tax burdens. Apportionment is the process of attributing income to specific jurisdictions for tax purposes. Prior to 1978, states required firms to use an equal weighting of property, payroll, and sales to allocate income to the state. By 2021, 34 states adopted a single sales factor apportionment, meaning only a firm's sales are used to allocate income. This favors in-state physical and human capital. We examine observations from 2000 to 2020 and find a state’s business constituency influences the state’s choice to adopt heavier sales weights. Consistent with business constituency’s influence, we also find a shift in the corporate state income tax burden from in-state manufacturing firms with a heavy physical or human capital presence within the state to out-of-state non-manufacturing firms with no physical presence within the state. However, total corporate tax revenues do not change post implementation. This evidence supports changes in apportionment result in a shift in state corporate tax burden from one set of taxpayers to another.