To What Extent Does Your State Rely on Corporate Income Taxes?
by Morgan Scarboro, Tax Foundation, April 19, 2017
Corporate income taxes are one of the smallest sources of state and local tax revenue. On average, only 3.7 percent of state and local tax revenues came from corporate income taxes in fiscal year 2014 (the most recent data available).
Some, however, mistake the corporate income tax as the entirety of a business’s tax burden. In reality, businesses pay many types of taxes (such as sales tax, property tax, excise taxes, and more) and the corporate income tax makes up only 9.5 percent of total business taxes.
The share of revenue from corporate income taxes will decline as more businesses organize as pass-throughs (S-corps, partnerships, sole proprietorships, etc.), which “pass their income through” to their individual tax returns and therefore are liable under the individual income tax code. Additionally, corporate income tax revenue will decline as more businesses receive special tax credits and incentives, eroding the tax base.
Today’s map shows what percentage of state and local tax collections derive from the corporate income tax. New Hampshire depends most heavily on the corporate income tax (9.4 percent of total tax collections) due to the lack of an individual income tax (except on interest and dividends) or a sales tax. Alaska comes in second (7.3 percent), again because the state does not levy an income tax or statewide sales tax. New York is the third most heavily dependent (6.9 percent) due to a heavy concentration of corporate payers and the state levies all major tax types.
At the other end of the spectrum, Nevada, Ohio, South Dakota, Texas, Washington, and Wyoming do not levy a corporate income tax, though four of these states (Nevada, Ohio, Texas, and Washington) levy a harmful gross receipts tax instead. Some of these states will still show a small amount of corporate income tax revenue due to taxes on corporate net income of special types of corporations (like financial institutions).
There are several reasons why the corporate income tax share is so low on average:
- The number of businesses organized as traditional C corporations has decreased over time. Pass-through businesses now earn more net income than traditional C corporations and employ the majority of the private-sector workforce.
- States hand out generous corporate tax incentive packages to move into (or remain in) their states. Jobs and investment credits, along with other targeted incentives, lower tax liability for some businesses and industries, effectively picking winners and losers while also chipping away at the tax base.
- States further reduce corporate tax bills by adjusting their income apportionment formulas, reducing the in-state taxable income of corporations within their borders. Location Matters helps to explain apportionment effects.
Corporate income taxes are not only limited in their revenue raising capacity, but they are also an extremely volatile tax type. During economic downturns, many corporations post losses and therefore have no tax liability under the corporate income tax.
Note: This is the second in a four-part map series in which we will examine the primary sources of state and local tax collections. Other maps in this series are linked below.