NCPA - National Center for Policy Analysis

Marginal Impact

October 6, 2011

Despite frenzied changes in state tax structures in recent years, the state corporate income tax receives little attention, a veritable dark horse compared with its federal counterpart.  But as economists and state legislatures are quick to point out, state corporate income taxes have been falling for decades, constituting a constantly diminishing fraction of state revenues, says Chad H. Hill, the economic policy studies program manager and a Jacobs Associate at the American Enterprise Institute.

  • Though the effective state corporate income tax rate was as high as 8.6 percent in fiscal 1987, it has since fallen to approximately 4.3 percent.
  • Because businesses are also responsible for property taxes and sales taxes, the corporate income tax makes up less than 10 percent of receipts from businesses.
  • Though state corporate income taxes raised $53 billion in fiscal 2007, that figure fell sharply to $38 billion because of the recession.

The factors that have played into this decreasing corporate income tax revenue trend are varied, ranging from technological developments to legal complexities.  Advancements in the mobility of capital have furthered the ability of businesses to carefully select regions in which to do business.  This change has fostered competition amongst the states to attract corporations, and lower corporate income tax rates are a common mechanism for achieving this end.

Additionally, as corporations expand their operations into the realm of interstate commerce, it becomes significantly more difficult to accurately assess tax liabilities within a given state.  Though the Supreme Court has established some precedent, fundamental questions about the apportionment of a given business' tax liabilities between states continue to abound.  These confusions result in inefficiencies and expensive litigation.

Source: Chad H. Hill, "Marginal Impact," American Enterprise Institute, September 26, 2011.

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