While corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. es are often mistaken for the totality of business taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. burdens, in reality they are just one of many taxes paid by businesses, and often a relatively small percentage of overall corporate tax burdens. Nationwide, corporate income taxes only account for 3.5 percent of state and local tax revenue. That figure will continue to decline as more businesses organize as pass-throughs (S corps, partnerships, sole proprietorships, etc.), which are liable under the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. code, and as more C corporations receive incentives and abatements which erode the corporate income tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. .
Today’s map shows how much each state collects in corporate income taxes per capita. Unsurprisingly, states like New York ($539 per capita) collect a great deal, due to a heavy concentration of corporate payers. Alaska has the highest collections per capita ($912), the result of a large presence from extractive industries combined with relatively low population. A similar dynamic is at play in fourth-ranked North Dakota, while third-ranked New Hampshire leans more heavily on corporate taxes (and property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es) due to the lack of an individual income tax (except on interest and dividends) or a sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. .
At the other end of the spectrum, Nevada, Ohio, South Dakota, Texas, Washington, and Wyoming do not levy corporate income taxes, though four of these states (Nevada, Ohio, Texas, and Washington) instead impose economically distortive gross receipts taxA gross receipts tax is a tax applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. es, and some states that forego a traditional corporate income tax still show a small amount of corporate income tax due to taxes on the corporate net income of special kinds of corporations (e.g., financial institutions). As such, only Nevada, Texas, and Wyoming show no revenue whatsoever from corporate income taxes, though all three of these states levy other business taxes, including, inter alia, Nevada’s Commerce Tax (a gross receipts tax) and Modified Business Tax (a payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. ) and Texas’s Margin Tax (a gross receipts tax).
There are several reasons why the corporate income tax share is so low on average:
- The number of businesses organized as traditional C corporations has decreased over time. Between 1980 and 2010, the number of pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. es nearly tripled, while the number of C corps actually declined.
- States hand out generous corporate tax incentive packages to entice businesses to move into (or remain in) their states. Jobs credits, investment credits, and other targeted incentives lower tax liability for certain businesses and industries, but they are distortionary and non-neutral, picking winners and losers while carving away at the tax base.
- States further reduce corporate tax bills by adjusting income apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. formulas, reducing the in-state taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. of corporations within their borders. Our Location Matters study helps explain the effect of apportionment in each state.
Beyond their limited capacity to raise revenue in most states, corporate income taxes are also highly volatile, as many corporations post losses during economic downturns and thus have no liability under the corporate income tax.
How much does your state collect in corporate income taxes per capita?Share