Belmont Law Review


Michael Bowen


Almost all states levy some form of corporate income tax. In administering a corporate income tax system, states must make a series of policy decisions, including the tax rate and tax base. A more interesting problem arises, however, when considering corporations that do business in multiple states: how to determine the portion of income attributable to business within each state. This policy of apportionment is a crucial element of a corporate income tax system. Although the federal government has considered involving itself in determining how this income is apportioned to the various states, it never has. States have very little federal restrictions on their capacity to determine for themselves how much interstate corporate income should be subject to their corporate income taxes. This leaves the states the crucial task of “slicing a taxable pie[.]” While there have been efforts to bring uniformity to the states’ apportionment schemes, states have recently splintered in their approaches. This is driven in large part by the states’ incentive to maximize their revenues while shifting tax burdens onto out-of-state corporations. The result is a system that is increasingly complex and difficult for corporations to navigate. It is a system that often subjects interstate corporations to overlapping taxation. Moreover, it is a system that increasingly pushes its tax burdens onto corporations that have very little ability to achieve political recourse. It is time for Congress to step in once and for all to fix this broken system and institute a simple, uniform formula of apportionment that guarantees states cannot reach out and tax those who are largely unrepresented in the state assemblies. Congress should implement single-factor payroll apportionment through legislation that mandates apportionment according to the percentage of the business’s payroll expenses paid to residents of that state. This formula presents the most straightforward approach to apportioning income with the lowest costs of compliance and administration. Applying it at the congressional level assures uniformity and negates the states’ incentive to craft their own laws to maximize the reach of their tax schemes. Further, it focuses the state’s taxing power on the corporations that employ individuals within its border — the very businesses that are most likely to be represented in the political process that determines the tax rate.



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