NCPA - National Center for Policy Analysis


February 19, 2007

A handful of states are taking a new look at an old, often-criticized business tax to thwart what they say are too many companies avoiding their fair share of taxes.

The states also hope to increase revenue to improve schools, create jobs, provide health care for the poor and pay for other essentials of government spending:

  • Kentucky, Texas and Ohio are the latest to adopt versions of the tax on companies' sales or profits, levied at a very low rate meant to apply to as broad a swath of corporate earnings as possible.
  • Michigan Gov. Jennifer Granholm has also proposed a version as part of a tax system overhaul.

The states' economic situations drove each to look more closely at the decline in corporate tax revenue brought on by the post-2000 recession.  State tax directors believed the drops in corporate taxes had been out of proportion in poor economic times:

  • Texas was under a court order to fix the way it pays for schools.
  • Ohio, with the country's seventh-largest economy, is facing low revenues as it tries to keep Medicaid spending under control and deal with its own school problems.
  • Kentucky and Michigan are both dealing with weak economies, and Michigan also needs another source of revenue as it phases out a universally despised single business tax.

However, some Kentucky lawmakers are pushing to repeal their flat tax, and states including Indiana dropped similar taxes out of concern they hurt businesses with low profits.

"It seemed to be an excessive burden on those companies that were not making money," said Stephanie McFarland, a spokeswoman for the Indiana Department of Revenue.

The tax is appealing to states because of the way businesses tend to outmaneuver more traditional corporate taxes -- "tax planning," as economists politely dub the practice.

Source: Andrew Welsh-Huggins, "Cash-Hungry States Eye Business Tax," Associated Press/Baltimore Sun, February 19, 2007.


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