This study examines the optimal location choice decisions of a two‐state firm in response to changing state corporate income tax rates and tax structures. Because the firm can engineer its tax liability by manipulating between‐state location of sales, property, and payroll, changes in relative state tax rates should result in the firm making such location changes. Results of a model firm simulation, examining various combinations of state tax rates and unitary vs. nonunitary tax structures, found that the firm would make interstate resource changes to minimize company‐wide state income taxes.

Important findings of the study are that tax rate changes in nonunitary states may cause little or no change in resources used in that state. Indeed, in one scenario, the resulting resource flows from a tax increase are favorable to the nonunitary state, making a tax increase a win‐win situation for the state government (higher tax revenue and more economic activity). In contrast, changes in unitary state tax rates can result in significant resource changes in both the unitary state and in other states. The finding that tax rate cuts are ineffective in nonunitary states implies that these states may be more successful in attracting investment by changes affecting apportionment factors (tax credits for new capital, or new jobs) or by use of nontax incentives.

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