Strategic Apportionment of the State Corporate Income Tax: An Applied General Equilibrium Analysis

Abstract

Using an eight-region, eight-sector applied general equilibrium model, we find that when imposed independently, single-factor sales policies may have substantially positive economic development impacts in the very long run, but that the magnitude of these effects varies considerably across regions according to their individual characteristics. If all regions act simultaneously, however, there are very clear winners and losers, and the competitive economic development landscape is markedly reshaped. In essence, the apportionment game is a prisoner's dilemma: regardless of the strategies of other states, each state's best economic development strategy is single factor sales. Moreover, we find that the revenue consequences of strategic apportionment policies, which have been under appreciated in both the literature and in state legislatures, are much more substantial in magnitude than are the economic development impacts, and tend to be felt immediately, while economic development benefits are much longer term in nature.