State
Corporation Income Taxation: An Economic Perspective on Nexus
by
David E. Wildasin Martin School of Public Policy and Department of Economics University of Kentucky Lexington, KY 40506-0027 USA
Abstract
Acting in the interest of their residents,
within limits imposed by Federal statute and by the Constitution,
states have incentives to impose taxes on the profits of corporations
owned by nonresidents. This paper presents a model within which a
state, using an apportionment formula that includes a sales factor,
would choose to tax the income of out-of-state corporations that
derive revenues from the sale or licensing of intangible assets to
in-state customers, provided that such corporations have sufficient
nexus to be taxable. Although such policies enable states to capture
rents from nonresidents, they also introduce tax distortions by
imposing implicit tariffs on sales by out-of-state firms.
Keywords: Nexus, State Corporation Income Taxation
