Emerging State Business Tax Policy

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Abstract

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.

Introduction

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. Given the relatively small contribution that corporate taxes make to total tax receipts, it is interesting that they receive so much attention in state capitols, industry location decisions, and the media. State corporate income and license taxes constituted only 6.5 percent of total state tax revenues in 2005 and, even combined with corporate license taxes, which include the value-based franchise taxes among others, represented only about 7.6 percent of taxes.1 Indeed, corporate income taxes provide no more than 10 percent of total state and local business taxes.2 There are several possible explanations, including the visibility of corporate facilities, perceptions of corporate tax abuse, and the difficulty of generating revenue from other sources. Though the issue of why the corporate income tax draws so much attention may be a fascinating study, we will simply accept that states have considered and made many changes in the corporate income tax even if they may have found other areas with more revenue potential.

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.

The report is composed of three sections. Section 1 reviews the revenue performance of corporate taxes over the past 15 years to provide insight into why states may have sought new strategies. Section 2 presents a brief summary of state corporate tax policy changes and reforms during recent years. Finally, section 3 analyzes the policy changes in terms of their long-term effectiveness, across a broad set of criteria, including their capacity to help or hinder states through economic cycles like 2001 to 2003.

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The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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