Tax Analysts Blog

Business Entities Pay a Lot of State Taxes

Posted on Nov 18, 2015

The Council On State Taxation and EY released their 13th annual business tax burden study. The study remains one of the most important publications in the state and local tax world. I have written about it many times.

The study's initial release, more than a decade ago, was a stroke of genius. Corporations were being pilloried at the time for paying little in income taxes. Myriad reports in the general press showed that many corporations paid no income tax. Liberals had the momentum in the argument that state laws should change to strengthen the state corporate income tax. Then COST released its report showing that while corporations weren't paying a lot of income taxes, they were paying hundreds of millions of dollars in sales, property, severance, employment, and other state levies. That report changed the trajectory of the debate, perhaps forever. The answer to the charge that businesses weren't paying enough became that businesses were actually paying roughly half of all state taxes. It took the wind out of the argument that business wasn't paying its fair share.

What can we learn from the COST and EY report today? First, businesses paid $688 billion in state and local taxes in 2014. That accounts for about 45 percent of all taxes collected. But the truth is that businesses don't really pay taxes; people pay taxes. So that $688 billion was paid by human beings -- owners, employees, and customers. Folks who clamor for higher taxes on business need to be reminded that the tax burden is not falling on some inanimate object.

In 2014 businesses paid about $250 billion in property taxes -- by far the largest single tax paid. The property tax accounts for about 26.4 percent of all business taxes. Like residential real property taxes, business property taxes go up every year (about 3.2 percent from 2013 to 2014). Real property taxes are good taxes when they're used to pay for local government services. In that sense, I think that business entities paying property taxes is appropriate. They use roads, courts, schools, and public safety services, and should contribute to their costs.

But a portion of the property taxes paid are actually levied on personal property -- usually machinery and inventory. Taxing mobile bases never works efficiently. It's too easy to manipulate the system and move personal property around. And even when there is no manipulation, taxing items like machinery just means you'll have less investment in machinery. Thankfully, the trend has been to move away from business personal property taxation.

Unfortunately, the next largest tax on business is the sales tax on business inputs and capital investment. In 2014 businesses paid about $142 billion in sales tax, or about 20.7 percent of taxes paid. More distressing is that they paid $5.8 billion more than in the prior year. The sales taxation of business inputs remains one of the greatest tax policy failings of the last 100 years. Business entities should not pay sales taxes on their services. Those taxes get passed on to someone else without their knowledge. Hiding the tax burden goes against every principle of transparent good government.

Two other taxes that account for a lot of business dollars are employment taxes ($48 billion) and excise taxes ($39 billion). I don't have an issue with state employment taxes, which are for unemployment insurance. They probably reduce wages to some extent, but that is a trade-off worth making. The excise tax bill is mostly for fuel taxes. Again, I'm OK with businesses paying fuel taxes. The gas tax remains the best practical way to fund transportation. If your trucks are on the road, you should be paying for the road maintenance. Other excise taxes, such as those on hotel and rental cars, are far less principled and represent the desire to export tax burdens.

Finally, according to the COST/EY study, corporations paid $64.4 billion in income taxes in 2014 -- an increase of $1.9 billion over 2013 and a 3 percent jump. I was shocked that the number was that high. Is the state corporate income tax making a comeback? But then I realized the study includes Ohio's commercial activity tax and Washington's business and occupation tax, neither of which are income taxes. I think it probably includes margin taxes in New Hampshire and Texas as well. The Texas margin tax alone raised about $4 billion in 2014. The Washington business and occupation tax raised another $3 billion. So I'm sure that the net corporate income tax amounts must be considerably less than $64 billion. My advice to COST and EY is to separate the gross-receipts-type taxes from those on net income. If that is done, no one will be thinking that the corporate income tax is making a comeback.

In any event, the study is a terrific public service. Policymakers and the public can learn a lot from the data presented.

Read Comments (2)

Bob GoulderNov 19, 2015

David: Why do states even bother with the corporate income tax? At times it
seems like the levy exists solely for the sake of being bartered away in
exchange for vague promises of future job creation.

Not DavidNov 29, 2015

Bob: State politicians can control when, where, who the levy is bartered away
for which.

So votes and donations and kickbacks.

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