The Effect of State Income Tax Apportionment and Tax Incentives on New Capital Expenditures

The purpose of this paper is to provide empirical evidence on the joint effects of apportionment and tax incentives on new capital expenditures. Specifically, we examine whether states with lower property factor weights in their apportionment formulae and/or lower corporate tax rates experience a higher level of new capital spending by manufacturing firms. Concurrently, we examine whether states with more investment-related tax incentives experience a higher level of new capital spending by manufacturing firms. Based on longitudinal data aggregated to the state level and spanning a ten-year period from 1987 to 1996, we find in annual cross-sectional, pooled, and fixed-effects regressions that property burden (the product of the property factor weight and the top statutory state corporate income tax rate)has a significant negative association with new capital expenditures, whereas incentives have a positive but decreasing association with new capital expenditures. This study contributes to the growing literature aimed at understanding the effects of subnational fiscal policy on state-level economic activity