The State Corporation Income Tax: Issues in Worldwide Unitary Combination

State corporation income taxes are in effect in 45 states. In 1980 they yielded $13.3 billion, about 10% of state tax receipts. This share has grown slowly but steadily for several decades, in contrast to the declining importance of the corporation income tax at the federal level. A number of issues relating to the corporation income tax remain unsettled. Debates over matters of equity, efficiency, and incidence persist. The operations of many corporations extend over state and international boundaries. Individual states have adopted a variety of different and often conflicting procedures for apportioning interstate income. Some states include foreign-source income in the apportionable total. During the past decade business interests and the states have entered a period of intense squabbling and increased litigation over procedures for apportioning income, particularly where foreign sources are involved. Against this background, Charles E. McLure, Jr., convened a conference at the Hoover Institution in November 1982. The participants included economists, lawyers, accountants, and tax administrators. State, federal, business, and academic viewpoints were represented. This volume contains nine papers delivered at the conference, along with the comments of two or more discussants for each paper. In most cases separate accounting is not a feasible method for apportioning the taxable income of multistate corporations among individual states. No satisfactory means exist for allocating common costs or savings from economies of scale. Assigning prices to intracorporate flows of goods and services is, in the absence of arm's-length transactions, a monumental task. Costs of administration and compliance make such procedures infeasible in all but the simplest of cases, and states are wary of the propensity of corporate accountants to manipulate accounts so as to minimize tax burdens. For these reasons, all states use formula apportionment to determine their share of the taxable income of most corporations that operate across state borders. Current state practice is described and analyzed in the lead paper by George N. Carlson and Harvey Galper. All but 10 of the 45 states with a corporation income tax use a 3-factor apportionment formula with equal