Strategic Cost Shifting and State Tax Minimization

In this study, we predict and find that multistate bank holding companies strategically allocate costs among their subsidiary banks to minimize tax. In particular, we find that high tax subsidiary banks report higher costs than low tax subsidiary banks within the same bank holding company. Additional tests provide evidence of cost shifting rather than operational differences amongst states. In particular, we find that high tax subsidiary banks of multistate bank holding companies report higher costs than single state banks in the same high tax state. Our study provides a unique contribution to the cost allocation and tax management literature by directly linking tax reduction incentives to cost allocation and documenting an alternative type of state tax minimization strategy in the banking industry