APPORTIONMENT: BY TOTAL
INCOME AND SECTOR
What is "APPORTIONMENT?"
Apportionment is the technical term for deciding how much of a firm's business income is taxed in the state. For a company with all of its business in Utah and which has no presence outside the state the apportionment fraction is 100 percent. A very large firm with operations all over the country, by contrast, may have a fraction less than 1 percent.
The rule adopted by Utah and by many other states uses a three-factor formula to determine a firm's Utah income. The wage factor is the ratio of state wages to U.S.- wide (water's edge) wages; similar ratios are calculated for sales to Utah residents relative to U.S.-wide sales and property values. The apportionment fraction is then the average of these three ratios. (A firm with no wages company wide, for example, would only average two factors.)
The larger a firm is, generally, a smaller percentage of its income is taxed in Utah. That of course is not surprising, since almost by definition a large company will be operating in many states and will only have a small portion of its activity in Utah. By contrast, a company with all of its operation in Utah is bound to be small.
Figure 3.1 plots the apportionment factor for various sized firms. In this figure and the parent charts in appendix C, income is measured as U.S.-wide business income for the company, as defined by Utah law. That is, all adjustments made to federal taxable income definitions, such as the limited charitable contribution deduction, the non-allowance of state taxes as a deduction, and the more generous deduction for business expenses, have been made. However, the income has not been reduced yet by apportionment to its Utah equivalent. The apportionment factor is the income- weighted average factor for all companies in the same class.
The following graphs and tables are for 1995 for non-minimum taxpayers, but basic data is available in appendix C for 1994 as well.
As the graph shows, as well as logic predicts, the share of income that is taxed in Utah declines as the companies get bigger. Companies in the bottom three brackets (income below $75,000) have over 90 percent of their economic presence in Utah. By contrast, companies with income over $10 million have about 1 percent of their activity here. For all companies not paying the minimum tax, the weighted average apportionment factor is only 1.3 percent, compared to 1.5 percent in 1993.
As well as being factually interesting, the above data have an interesting policy conclusion. For companies that pay the most taxes and are the largest nation-wide, the state can do very little to improve or worsen the fiscal situation of the firm. For example, for a large firm that suffers a loss, the provision of a Utah loss carryback and the refund of previous taxes will not have much impact on the firm's health. Similarly, for large firms, the size of the Utah charitable deduction is likely to be inconsequential for determining the firm's contributions.
Are there industry differences?
Since so many of our companies do a small portion of their business in Utah, we should not expect any sector to be Utah dominated. For all sectors, the average factor is the same 1.3 percent as above.
Nonetheless, there are important differences in the apportionment factor, by major industry. As figure 3.2
Apportionment details by sector
Several alternative approaches to apportionment details are present in the three panels of table 3.1. Panel A shows the raw data, and is useful for asking questions about the importance of each factor's use in Utah for a given sector. For example, in wholesale trade, only 0.35 percent of the property used by firms doing business in Utah is located in the state.
The other panels reflect the same data, only more conveniently arranged. Panel B, shows for each sector how each apportionment factor is ranked. Generally, there is not much difference, since for many sectors, sales, wages, and property are used together. But in mining, for example, it ranks 10th in its share of sales, but the share of wages paid in the state is 7th, which is reasonable since most mining output is exported.
Panel C shows, for each sector, the ratio of a specific factor to the total apportionment factor. One use of this table is to evaluate in a quick way who would benefit from alternative apportionment schemes. As mentioned earlier, Utah weights all factors equally. An increasing number of states are beginning to use unequal weights, typically giving extra weight to sales, in an attempt to favor firms that produce in the state. Looking at all sectors, the sales factor is less than the average of the three, at 91.5%, so increasing its weight would reduce revenue. But for mining, whose sales in the state are low relative to wages, taxes would fall. By contrast, wholesale trade, whose share of sales in the state are much higher than its use of other factors, would see taxes increase. Construction would not care how income is apportioned, since its relative use of all factors in the state is nearly the same.