Taking a Closer Look at Corporate Taxes

State corporate income tax collections in the United States have decreased sharply in the past two decades. This fact baffles economists because it coincides with increasing corporate profits as a share of national income, and does not correspond with the trend in federal corporate tax revenues. Many states raise more revenue from lotteries or tobacco and fuel excise taxes than from state corporate income tax.

Jared Moore, the Mary Ellen Phillips assistant professor of accounting at Oregon State University, and three co-authors analyzed 20 years of data from 43 states to determine some of the potential causes of and remedies for the decline in state corporate income tax revenues. Their research was featured in the June 2009 issue of the National Tax Journal, serendipitously coinciding with the Oregon legislature’s decision to increase corporate income taxes—a decision that was referred to voters and affirmed by a solid majority.

Moore and his research partners are carefully scrutinizing several issues that relate to corporate income taxes. Moore’s research interests include the interaction between taxes and corporate business decisions, tax reporting aggressiveness, the interaction between tax reporting and financial reporting, and federal and state tax policy issues.

The recent study published in the National Tax Journal shared findings about various state corporate income tax policies, including the apportionment formula states use to allocate a multi-state corporation’s total taxable income. In the past, the standard structure of this formula placed equal weight on three factors: sales, property, and payroll. As tax revenues have declined, tax policies have been adjusted to attract new businesses, and states are giving more weight to the sales factor.

“It gets very complicated, because in addition to meeting their revenue needs, states also want to offer a business-friendly tax environment to attract companies to locate within their borders, creating competition among states,” said Moore. Some states, including Oregon, base their apportionment formula solely on sales, making the location of payroll and property irrelevant in the allocation.

Weighting the sales factor more heavily favors in-state businesses that export to out-of-state locations and theoretically places a larger tax burden on out-of-state businesses that import to locations within the state, Moore said. The idea is to encourage corporations to domicile within the state; however, results of Moore’s study suggest that placing higher weight on the sales factor is associated with lower state corporate income tax revenues, at least in the short term.

As a next step, Moore and his colleagues are in the early stages of studying the long-term effects of apportionment formula weights to discover whether there is an eventual net revenue gain for states that weight the sales factor more heavily. This research could be useful to policymakers as they assess the extent to which such policies have their intended effects.

Moore is also involved with multiple projects that investigate factors associated with either “aggressive tax reporting” by corporations or characteristics of “book-tax differences.” Tax reporting aggressiveness describes the extent to which companies structure their activities and/or reporting for the purpose of minimizing taxes. Book-tax differences reflect the spread between the income measure reported on the financial statements and what is reported for tax purposes.           

“The more we can learn about how companies make their decisions and what factors are associated with how they report for tax purposes, the more information policymakers have at their disposal when they set policy,” said Moore. “From a corporate decision-making perspective, academic tax research can give them some sense of how firms would be likely to respond if there was a change in tax policy. From a tax reporting perspective, tax aggressiveness studies may help the Internal Revenue Service or other taxing authorities narrow the focus of their enforcement efforts.”