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Levying State Corporate Income Tax A Waste Of Time


May 21, 2015
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“Levying a state corporate income tax is a waste of time“, tax expert, David Brunori, wrote in The Tax Analysts Blog.

Brunori, research professor at George Washington University and deputy publisher of Tax Analysts, asserted that states should repeal this particular policy. “States should, at the very least, conduct an honest inquiry into why they have a corporate income tax in the first place”, he stressed. Advocates of such levies have offered many reasons as an explanation, including producing revenue for states, lowering inequality and helping remunerate individual states for the benefits they provide companies. However, Brunori emphasized the cost of imposing this policy – which involves planning, auditing and litigation.

Federal Proposals

Brunori made his arguments for eliminating the state corporate income tax at the same time lawmakers are considering reforming corporate income tax policy at the federal level. Earlier this year, President Barack Obama has proposed cutting the top rate for this levy on corporate income to 28 percent, imposing a minimum tax on all profits earned overseas and extending depreciation lives. Obama is not alone in his desire to reform corporate income tax policy, as Rep. Dave Camp, R-Mich., proposed cutting the top rate to 25 percent and also eliminating the Alternative Minimum Tax for corporations and pass-through entities. In addition, Sens. Marco Rubio, R-Fla., and Mike Lee, R-Utah, suggested lowering the top rate to the same level of 25 percent and also permitting companies to take part in full expensing.

Meager Income

As the corporate income tax draws attention at both the federal and state levels, Brunori asserted that the policy does little to pad state coffers. Brunori pointed to a report from the Tax Foundation, titled “State Corporate Income Tax Rates and Brackets for 2015,” which stated that corporate income taxes account for only 5.2 percent of state tax collections and slightly more than 2 percent of all state tax revenue. In 2014, the state corporate income tax raised about $46 billion out of roughly $870 billion worth of taxes, he noted. Since states have opted to avoid combined reporting and instead provided tax incentives and weaker apportionment formulas, the levy is ineffective at generating revenue. If states want the policy to effectively produce income, they should take the exact opposite approach. Thus far, states have been resistant to making any such change. “While some support taxing corporate profits to provide states with greater revenue, others contend that such policies help fight inequality through redistribution”, Brunori noted. While this argument has succeeded in generating visibility, the tax expert emphasized that it is based on the assumption that shareholders bear the burden of corporate income taxes. However, not everyone buys into this premise, as some contend that consumers pay this cost and others state that workers do. Because of all this disagreement, lawmakers who advocate taxing corporate income at the state level will need to provide sound justification for doing so, Brunori predicted.

Consumption Taxes

Some argue that a Value Added Tax would provide greater revenue than a corporate income tax.  The burden is imposed on consumption, thereby shifting taxation to those transactions that consume resources.