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Single-factor apportionment -- one factor too many?

January 13, 2011

New Jersey is planning have its corporate taxpayers allocate their income to New Jersey using the "single factor sales formula," reports David Brunori at Tax.com. Iowa pioneered single-factor apportionment, which taxes corporations by their ratio of in-state sales to total sales. The traditional three-factor formula also took into account the ratios of in-state to out-of state payroll and property. Why is New Jersey doing this?

The Democrats bought into the fallacy that single-factor apportionment will lead to economic growth and job creation. But there is no evidence that watering down the apportionment formula leads to more jobs or more investment.

The idea is to reward locally-based businesses by not including property and payroll in the apportionment base, while sticking it to out-of-state sellers by ignoring their property and payroll. It's a very old-economy way of looking at things.

Defenders of Iowa's highest-in-the-nation corporate tax rate often say it doesn't matter because single-factor apportionment makes up for it. But with 20 or so states using either single-factor apportionment or factors giving extra weight for sales, whatever advantage single-factor provides has eroded. Far better to just ditch the Iowa corporation tax -- a minor factor in the Iowa revenue picture -- and go with the Quick and Dirty Iowa Tax Reform.

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