State’s must use some kind of formula to tax corporations who operate in several states including the home state (i.e NC) and sell goods or services in several states. The condundrum is: how much do we tax a company that makes 100 000 units here but sells only 1000 in state, the rest sold elsewhere?

Combined reporting is one obvious method to stop companies moving profits from one state to another in a cynical tax minimization strategy. The other is the use of apportion formulas. These formulas are used to arrive at a number on which the tax is assessed. They have been based on three factors: property value, payroll and in-state sales.

You can see how a company that has a high payroll or property value would benefit from a shift in the formula to one that leans on the in-state sales figure. If I am a company that makes a lot of widgets here but doesn’t sell a lot here, then being taxed on the basis of in-state sales represents a massive tax cut.

This is what the bill does, but only for property (ie capital) -intensive companies.

The problem is, what happens if other states suddenly decide, “Why don’t I do that, too?” As happened in Illinois a few years back, you may end up getting the perverse result that companies that lobbied for the move to a sales-based formula in a nearby state (i.e in Michigan) turn around and say, “Next door state, don’t do that. It is unfair!”

The real inequity is what is does for state services.

Apparently the Governor is pushing for this bill. She needs to read the considerable literature on the topic that concludes that this is one tax strategy that does not work in producing employment growth.

A better approach to attract companies, if you have to go there, is to use direct employment subsidies. Of course, and as most business executives fully know, no company worth its weight makes a location decision based on the tax code since the state can give and the state can taketh away, not to mention what the state next door can do. Rather, it bases decisions on longer term factors – education of the workforce, proximity to markets, and the health of the transportation infrastructure.

“North Carolina shifted to a double-weighted sales factor apportionment formula in 1988 at the request of RJR Nabisco.

RJR Nabisco had plans for a large automated bakery in the Garner area. After the change was adopted, RJR Nabisco was bought out and forced to cut back on capital expenditures. The compnay never built the plant.”

Wonder what bill analysts will be writing in 2030 if this idea actually becomes law.