Citation URL: http://www.urban.org/WilliamFFox

Much of the state tax policy discussion during the past decade has centered on the performance of corporate income taxes and ways to restructure them. This report focuses on state responses to the weak corporate tax collections during the 2000-2003 period as well as to the revenue performance during the years immediately preceding and following the recession. The report is not an attempt to argue that the corporate income tax is an important component of good state tax policy. Instead, our focus is on identifying state tactics to maintain or change the tax, determining whether those strategies are good tax policy, and evaluating whether they are working to achieve the basic goals of the states.

State tax revenue growth slowed in 2001 and nominal tax revenue actually declined in 2002, the first decline in at least 30 years. The personal and corporate income tax and the sales tax all yielded lower revenues in 2002 than in the previous year. Three characteristics of the tax structure have been important factors in the revenue decline. First, the corporate income and sales tax bases are eroding, and this process accelerated during the past several years. Second, state tax structures are pro-cyclical. Third, except for the personal income tax, state taxes are inelastic. States could have lessened the impacts of the significant revenue slowdowns by building larger rainy day funds in the 1990s, when revenues were growing faster than personal income.

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