1998 JATA Conference Multijurisdictional Tax Issues

Volume 20, Supplement

The Impact of State Taxation on the Investment Portfolio of Banks

Roby B. Sawyers and Mark S Beasley

Abstract

This study examines the relation between state corporate tax provisions and the investment portfolios of banks. Consistent with federal tax laws, certain states disallow state tax deductions for interest expense incurred in generating tax-exempt income. However, three states have tax-law provisions allowing banks to deduct the interest expense incurred to earn tax-exempt interest on U.S. government and municipal securities. Recently, the effects of this difference in state tax policy and its impact on state income taxes paid by banks and their investment portfolios have been debated. Critics argue that this provision encourages banks in deduction states to invest more heavily in tax-exempt securities than banks in states without the deduction provision. This study provides insight to the debate by empirically finding that the impact of the deduction provision is contingent on the bank’s state marginal income tax rate. As banks face higher marginal state income tax rates in deduction states, they are significantly more likely to invest a greater percentage of their assets in U.S. government securities than banks facing low tax rates in deduction states or banks in states not allowing the interest expense deduction. These results should be relevant to state tax policy makers and banking industry officials who have a vested interest in the debate of this provision.  


Taxes as a Determinant of Foreign-Owned Property-Liability Insurers’ Investment Strategies in the United States

Bin Ke, Edmund Outslay and Kathy R. Petroni

Abstract

This research investigates the influence of home-country tax systems on foreign-owned property-liability insurance company investment strategies in the United States. Specifically, we compare the investment strategies of foreign insurers subject to home-country territorial and worldwide tax regimes. We predict that U.S. subsidiaries and branches of foreign insurers domiciled in territorial tax countries will hold more U.S. tax-favored assets than their counterparts subject to a worldwide tax regime. We also predict that U.S. subsidiaries of foreign-owned insurers domiciled in worldwide tax countries will hold more U.S. tax-favored assets than branches of such companies. Consistent with our prediction, we find that worldwide branches invest a significantly smaller proportion of their asset in U.S. tax-exempt bonds than do territorial insurers (both branches and subsidiaries). However, we find no statistically significant difference in the investment practices of worldwide subsidiaries and territorial subsidiaries. These results indicate that tax deferral available to worldwide subsidiaries may be the equivalent of tax exemption for investment in U.S. tax-exempt bonds. The results contribute to a stream of research that investigates how alternative tax regimes affect direct foreign investment in the United States (e.g., Collins et al. 1995; Hines 1996, 1997; Scholes and Wolfson 1990). 


 Distortion Caused by the Use of Arm’s-Length Transfer Prices

David G. Harris and Richard C. Sansing

Abstract

This paper examines the effects of using an arm’s-length transfer price, such as the Comparable Uncontrolled Price (CUP) method, to allocate income for tax purposes between a manufacturing entity and a selling entity within a multinational enterprise (MNE). The CUP method allocates disproportionately high levels of income earned by the MNE to the manufacturer in our model. This result is consistent with the anomaly identified in Grubert et al. (1993) and Collins et al. (1997), in which U.S. subsidiaries of foreign MNEs frequently report zero, or near-zero, taxable income. In addition, the CUP method distorts decisions regarding production and organizational structure when the tax rates in the two countries differ. 


 The Effects of Alternative State Tax Regimes of Firm’s Accounting and Financing Decisions

Susan L. Porter

Abstract

State taxes as a proportion of total corporate taxes have been rising over the past decade. As a result, state tax planning is becoming increasingly important. Prior tax research has examined the effect of federal taxes on management financing and accounting decisions. This study expands upon this research by examining the effects of differing state tax regimes on management decisions. California’s income tax, Michigan’s value-added tax and Texas’ net worth tax are examined, and hypotheses are developed about how accounting and financing decisions are affected by these very different types of taxes. Test variables include the level of debt and accounting accrual choices. Results suggest that firms’ levels of discretionary accruals are differentially affected by different state tax regimes.

Letter from the President

To ATA Members and Visitors,

The American Taxation Association (ATA) is home to a broad group of members with interests in tax research, policy, practice, and education. We are in a time of transition that includes the ongoing pandemic; both AAA’s and ATA’s Diversity, Equity, and Inclusion initiatives; and the CPA Evolution. I thank our members Kirsten Cook, Diana Falsetta, and Annette Nellen for their service in these endeavors. I also thank Tim Rupert for his service as AAA Director focusing on Segments.

Our last mid-year meeting was virtual and could not have happened without our excellent ATA leadership. Thank you to Jeri Seidman, Mollie Adams, Bridget Stromberg, and their respective committees for their flexibility and tenacity in organizing their portions of the conference...

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Anna Catherine Fowler

In Memoriam,
Anna Catherine Fowler received her BS in accounting from the University of Alabama, after which she practiced for several years as a CPA. After moving to Texas with her husband Jim, she earned her MBA and PhD from the University of Texas at Austin.

She joined the faculty of the business school of the University of Texas in 1977 as the first female tenure track professor hired by the accounting department. She remained at UT until she retired in 2004 as the John Arch White Emeritus Professor in Business.

During Anna’s distinguished academic career, her research and teaching interests focused on estate and gift taxation. She was an active member of the AICPA’s Tax Division and the American Taxation Association, for which she served as 1993-94 president.

In 2002, Anna received the American Taxation Association’s highest honor, the Ray M. Sommerfeld Outstanding Tax Educator Award. She also received the Texas Society of CPA’s Outstanding Educator Award.

Anna and Jim made the most of their retirement years, delighting in travel all over the world. They finally settled in a retirement community in Chapel Hill, North Carolina. Even after Jim’s death in 2019, Anna continued to travel with friends, root for her beloved Alabama football team, and live her life to the fullest. She passed away peacefully on October 19, 2021.

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