| State taxes as a proportion of total corporate taxes have been increasing over the past decade. As a result, the relative importance of state tax planning is increasing. Prior research has examined the effect of federal taxes on management decisions. This dissertation examines the effects of differing state tax regimes on management decisions. California's income tax, Michigan's value-added tax, and Texas' franchise tax are examined. Hypotheses are developed and tested regarding how accounting and financing decisions are affected by these very different types of taxes. Test variables include the level of debt, the dividend payout ratio, and the level of discretionary accounting accruals.; Results are consistent with the hypothesis that the dividend payout ratio is higher in Texas, which has a tax on net worth, than in Michigan or California, which have taxes on operations. Results also are consistent with the hypothesis that the level of debt is higher in Texas, which offers tax incentives for debt, than in Michigan, which does not offer any tax incentives for debt. These results suggest that state taxes do affect management decisions. This suggests that states should consider the effects of taxes on managers' decisions when considering changing tax laws. In addition, this result suggests that state taxes may be an omitted variable in studies that include firms facing different state tax regimes.; Predictions about the level of discretionary accruals, however, are not supported. The levels of discretionary accruals are not significantly different for firms in Texas, which measure net worth for state tax purposes using accounting numbers, than for firms in California or Michigan that are not taxed based upon accounting numbers. The level of debt is not significantly different for firms in Michigan which does not have a deduction for interest expenses than for firms in California, which does offer tax benefits for issuing debt. |
