APPORTIONMENT: BY TOTAL INCOME AND BY
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.
Chart 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 1997 for non-minimum taxpayers, but basic data is available in appendix C for 1996 as well.
As the graph shows, and 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 nationwide, 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
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 Chart 3.2 shows,
Construction, followed by Transportation,
Communication and Utilities, and
Manufacturing are more likely to have a
higher share of their activity here. This is not
surprising, given the small and local scale of
many construction companies, real estate
brokers, and insurance agents. By contrast, the
Mining and Wholesale Trade sectors are more
dominated by large national firms. At this
point, we think it is good to remind the reader
that we are only considering firms that are
incorporated, and not the many small local
operations that are sole proprietors or
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.
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 92.2%, so increasing its weight would reduce revenue. 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 or Retail would not care too much how income is apportioned, since its relative use of all factors in the state is nearly the same. Manufacturing and Services, in addition to Mining, would be the major beneficiaries of over-weighting sales.