Question

Boeing is considering opening a plant in one of two neighboring states, Oregon or California.

Let’s just say, California has a corporate tax rate of 15%. If operated in this state, the plant is expected to generate $1,200,000 pretax profit.

In Oregon state has a corporate tax rate of 5% and operation in Oregon state, the plant is expected to generate $1,085,000 of pretax profit.

Which state should Boeing choose based upon tax considerations only?

Why do you think the plant in the state with a lower tax rate would produce a lower pretax income?

Answer 1

    California   Oregon

pretax Income$1,200,000  $1,085,000

Tax Rate 15% 5%

Tax paid $180,000 $54250

After tax Income$1,020,000 $1,030,750

If just considers tax only, Boeing should consider open a plant in Oregon, because itprovides higher after-tax income. If the Boeing company takes tax effect into accounts whenthey determine the prices, they will determine their profit margins accordingly. If they open aplant in a higher corporate tax state, in order to off set the effect of the higher tax rate, theywill markup more thereby generate a higher pretax income. If they open a plant in a lowercorporate tax state, they will markup lower thereby produce a lower pretax income