Tax Formula Changes - including Single Sales Factor

Tax Formula Changes (including Single Sales Factor)

Subsidies such as tax credits or tax abatements grant fiscal relief to specific companies that meet eligibility requirements or that strike a deal with the government to bring new jobs or investment to an area. Tax formula changes, on the other hand, alter the method by which all companies in a given jurisdiction or industry are taxed. Tax formula changes are permanent and apply to companies whether they are promising to create new jobs or not.

Many companies and industries lobby for tax formula changes under the guise of economic development. They persuade state legislatures to change their tax codes with the argument that they will be unable to create, or even retain, jobs in the state unless their tax obligation is lessened.

One of the most common types of tax formula changes, and one of the most corrosive to state budgets, is a tax formula called Single Sales Factor (SSF). Currently on the books in about 20 states, SSF is pushed aggressively by manufacturing companies because it drastically reduces their state income tax bills.

How SSF works

Traditionally, states use three factors to determine how much of a company's profits are taxable in a given state: 1) the share of its employees who work in the state; 2) the share of its physical assets that are in the state; and 3) the share of its sales that occur in the state. Each of these factors is weighted equally, and a company's income tax is based on the combination of the three.

Under SSF, the only factor that is used to determine a company's income tax is its sales in that state. Most manufacturers have their assets and employees in a small number of states, but sell regionally or nationally, so if the states in which they manufacture switch to SSF, their tax bills go way down. Campaigns for SSF are often spearheaded by one or two big companies that are threatening to move or expand out of state and that argue that the change would allow them to change their plans.

Not everyone wins under SSF, however. Think about these examples: If you're a giant manufacturer with lots of payroll and property in Maryland, but only two percent of your sales in the state, you get a huge tax break under SSF, because now your corporate income tax is based solely on the value of those sales. If you own a corner drugstore in Baltimore, 100 percent of your payroll, property and sales were in-state before the state adopted SSF, and they still are now, so your tax bill didn't change a bit. If you own an oyster-canning company headquartered in Delaware and you sell a third of your oysters in Maryland but only have a fifth of your payroll and property in Maryland, your Maryland tax bill went up under SSF.

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.

Companies that benefit from SSF in one state may be hurt by it in another, a fact that is reflected in the fact that companies sometimes lobby for SSF in one state and against it elsewhere. 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 (see the Mazerov and Forsberg papers cited below).

Accountability and outcomes

Corporate lobbyists have been pushing SSF as an economic development boon, but the emerging evidence shows no such benefits, just declining state revenues, and a burden shift onto families and other businesses.

The theory behind SSF says: if you adopt a tax formula based on the single factor of sales that gives manufacturers a big tax cut, such companies will relocate or grow in your state. But this assumes other states are not adopting the same formula. In reality, every time another state adopts SSF, the value of the formula to the SSF states gets diluted.

The effect of adopting SSF is a decline in state revenue, which means less money available for state services and programs. Changing the tax formula to take into account only sales ignores the reality of why companies pay taxes. Ignoring a company's payroll and property is like saying the company doesn't physically exist in a state. If a company has a lot of payroll in a state, that means the state has a lot of families with future workers to educate, a lot of roads to maintain, a lot of public safety and sanitation service to provide. Likewise, if a company has a large amount of property in a state, that indicates it has significant activity there, and creates a lot of wear and tear on infrastructure and demand for public services there. States with SSF are endangering their ability to maintain their business basics -- the infrastructure, schools, and quality of life factors that are really important to attracting businesses.

Finally, tax formula changes are the least accountable of all economic development subsidies. Companies may talk about remaining or expanding in a state if they get the changes they desire, but they don't have to make any commitments, and the state is powerless to recoup their losses if the company doesn't follow through. Companies don't have to meet any criteria such as investment amount, job creation, or wage rates to qualify for the subsidy. Instead, they are subsidized for what they are already doing.

Researching tax formula changes

Researching tax code changes can be daunting, since you have to both understand the past and present (or proposed) laws, and calculate the impacts of the changes. It is also hard to tell whether job creation or retention can be attributed to tax law change, as its proponents may suggest, or whether it would have occurred regardless.

It is generally not possible to uncover the impact of tax formula changes on specific companies, since corporate income tax filings are confidential. Occasionally, particularly if it is running a lobbying campaign for SSF, a company may make public statements to legislators or even journalists estimating its tax savings under a new tax formula.

Information on the total corporate income taxes collected by the state is available by contacting the state Department of Revenue. State tax law is contained in a state's statutes and elaborated in its tax code. Check the website of the state Department of Revenue for help in locating a particular tax law.

Be sure to use the research capabilities of state agencies to their fullest extent. Often, the state legislature's research office will do a fiscal analysis of tax code changes when they are proposed. The documents are often linked online from the bill summary on the legislative website if a bill is actively under consideration. Older analysis may often be obtained through the legislative research office. The staff of legislators who supported or opposed the bill may also have done analysis, or be able to lead you to others who did. Don't accept every figure at face value, however, since interest groups often commission analyses that show the impact that supports their cause.

The Institute on Taxation and Economic Policy (ITEP), a non-profit, non-partisan organization based in Washington, DC, can analyze the effects of federal, state, and local tax code changes through the use of its Microsimulation tax model. Their analysis includes information about the impact of tax changes on state revenues and on people of different income levels. See their website at

For more on Single Sales Factor, see:

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

Mary E. Forsberg, Single Factor: Double Trouble, New Jersey Policy Perspective, 2001, online at