Public-Input Provision under Formula Apportionment

This paper analyzes how the presence of corporate income taxation with formula apportionment affects public-input provision. In a federation endowed with a fixed amount of mobile capital, noncooperative regional governments provide factor-augmenting public inputs and maximize their budget surplus. It is shown that the different systems of formula apportionment have different implications for expenditure inefficiency, although interregional competition for mobile capital always results in undertaxation.