Key Reforms: Tax Policy

Reform #6: Keep State Tax Policy out of the Subsidy Debate

When is a tax not a tax? When it’s a subsidy! Typically when we talk about subsidies, we’re talking about tax credits and tax abatements: exemptions from or reductions of taxes, granted either through a subsidy program or through individual negotiations with a specific company thinking of locating or expanding in an area.

But in many states, companies have successfully lobbied state legislatures to change the tax code itself in the name of economic development. Tax formula changes alter the method by which corporate taxes are calculated, so that a company’s normal, unsubsidized tax obligation is reduced.

Companies lobbying for tax code changes often adopt aggressive persuasive techniques, threatening to move or expand out of state if they don’t get the tax breaks they seek. And too many state legislatures cave to corporate demands. See Lobbying for Subsidies in the Corporate Subsidy Watch section for more on the role corporate interests play in shaping tax policy.

Why we care about taxes

Cutting corporate income taxes by changing the definition of taxable income flunks every measure of accountability. Companies don’t have to apply for the break, so they don’t have to make any commitments to invest a certain amount of money, create jobs, or pay a living wage. There’s no transparency and no paper trail of applications and development agreements, so state development officials can’t even begin to guess at the costs and benefits. And although companies may talk in vague terms about retaining or expanding employment in the state, tax formula changes usually don’t have any type of clawback provision, so there’s nothing to stop companies from taking the money and running.

In addition to poor accountability, tax code changes can bring about a permanent drop in state revenues and gaping holes in state budgets. When corporate taxes are reduced, states and cities either have to cut public services or raise other taxes to sustain those services. Mainly, the response has been to raise sales taxes and property taxes – regressive taxes that hit low- and middle-income families hardest.

Single Sales Factor

Single Sales Factor (SSF) is one of the most common and most corrosive changes some states have made to their corporate income tax formula. Historically, states have weighed three factors in calculating a company’s tax bill: the share of its payroll, property, and sales that are located or occur in the state. SSF changes that calculation so that payroll and property never enter into the equation, and companies are taxed solely based on their in-state sales.

For a large company that manufactures products in one state but sells them all over the country, the effect of this formula change will be a giant tax cut. But while SSF cuts taxes for some companies, it raises them for others. Companies that do all their business in the region — often smaller businesses — may not see a change, or may actually see their tax bills go up.

To date, about 20 states have enacted SSF. In some of these states, the formula applies only to manufacturers. Other states have given sales a double weighting, so their formulas are 50 percent based on sales and 25 percent each on property and payroll. A few more states have super-weighted sales to as much as 80 percent.

At least six states have estimated how many winners and losers there would be if SSF were adopted. In every single case, the states conclude that more companies – sometimes almost twice as many – would pay higher taxes than would get tax cuts. Winners get bigger tax cuts than the tax hikes suffered by the losers, so overall revenue goes down.

Of course, these distortions mean that some multi-state companies would prefer to have it both ways: to have SSF in some states, but not in others. Usually they don’t talk about it publicly. But Kraft Foods lobbied for SSF in Illinois (where it is headquartered) and then opposed it in Maryland. Ford Motor Company led a campaign for SSF in Michigan (where it is based), but then opposed it in Illinois. And AT&T backed SSF in New Jersey, but opposed it in Oregon.

Best practice

SSF is only one of the ways in which companies wrangle permanent subsidies into their tax bills. Corporate America’s contribution to state budgets has declined dramatically in recent decades, due to a combination of lower tax rates, altered tax formulas, tax credits, and tax loopholes.

The best practice is to stand up to corporate pressure and choose to preserve or restore tax fairness among different types of employers and taxpayers. States should reject policies that shift the tax burden onto individuals and should close tax loopholes that allow large companies to avoid paying their fair share.

More information

Information for this section came in part from Greg LeRoy, The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation. San Francisco: Berrett-Koehler Publishers, 2005.

See also:

Michael Mazerov, “The ‘Single Sales Factor’ Formula for State Corporate Taxes: A Boon to Economic Development of a Costly Giveaway?” Center on Budget and Policy Priorities, September 2001, online at

For more on state tax policy in general, visit the Institute for Taxation and Economic Policy at