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July 18, 2000

Single-sales factor helps states in jobs race, studies find

States that change their corporate tax apportionment rules to a single-sales factor are likely to gain manufacturing and other jobs while states that do not do so may lose them, according to new studies reported by the National Conference of State Legislatures.

One of the studies appears to indicate that adoption of a single-sales factor in New York State could result in a gain of more than 160,000 new jobs. Those new jobs would produce tax revenues that would largely offset corporate tax revenues that would be lost through a change to the single-sales factor, economists say.

Like all the states that have a corporate income tax, New York taxes multistate firms based on the proportion of a given company's total business that is conducted in the Empire State. Traditionally, that proportion is measured by a combination of three factors: payroll, property and sales.

By 2001, seven states-including Massachusetts, Illinois and Connecticut-will use only the sales factor (an approach often called the single-sales factor) in apportioning tax liability for some or all businesses. Over half of the 50 states, including New York, have increased the weighting on the sales factor in recent decades, giving it twice the weighting of the other two factors.

The effect of such a change is to encourage companies to locate more of their plants and jobs in the state, by reducing the tax they must pay based on those factors.

"The trend toward emphasizing the sales factor in apportionment formulas is being driven by the desire to create a tax-friendly environment for manufacturers and other labor- and infrastructure-intensive businesses," NCSL states in the June issue of State Policy Reports newsletter. "Research has shown that the economic development benefits of this policy are significant."

The NCSL article reports on two studies by University of Chicago economists that examine the potential economic benefits of the single-sales factor. In one study, the economists found that reducing the payroll weighting from one-quarter to zero would increase manufacturing employment in an average state by 2.4 percent, and non-manufacturing employment by 1.9 percent. The estimates take into account the impact of deductibility of state taxes for federal tax purposes. (The study was originally reported in the March 13 State Tax Notes.)

In New York, such an impact would mean 22,000 additional manufacturing jobs and 144,000 new positions in other sectors, for an overall difference of more than 160,000 jobs.

The potential benefits of such a change in New York were discussed during The Business Council's 2000 Annual Conference on State Taxation in late June. The Council's Committee on Taxation has made the issue its top legislative priority.

In a broader study issued in February 1999, economists Austan Goolsbee and Edward L. Maydew said that including payroll in the apportionment formula "returns the state corporate income tax at least partially into a payroll tax."

"This distortion has an important effect on state-level employment," the economists wrote. Their 1999 study, Coveting Thy Neighbor's Manufacturing: The Dilemma of State Income Apportionment, examined tax and jobs data for all 50 states from 1978 to 1994. During that time, some 20 states made changes to apportionment formulas, making it possible to study the resulting economic effects, the study said.

It concluded that, for the average state, reducing the weighting of the sales factor from one-third to one-quarter of the total increased manufacturing employment by approximately 1.1 percent and other employment by 0.7 percent. (The 1999 study is available on the Web at http://gsbadg.uchicago.edu/vitae.htm.)

While states such as Illinois and Michigan are benefitting from newly revised apportionment formulas, other states-including New York-are likely to be losing jobs as a result, Goolsbee and Maydew suggested.

"Reducing the tax burden on payroll in the state by reducing the corporate rate or the payroll weight in the apportionment formula increases manufacturing employment significantly," the economists wrote. "When other states reduce their payroll tax burden it does the opposite, lowering employment in the state. On average, each of the jobs created in the state (that increases the weighting of sales) seems to come directly from a job lost in other states."

The economists also found that, "As a means of stimulating job creation, apportionment changes may be a relatively cost-effective way to increase employment when compared with other economic development policies." One reason is that new jobs created as a result will generate personal-income and other tax revenues to offset part or all of the corporate income tax revenue."