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States are experiencing a rapid decline in state corporate income tax revenue, and the downward trend has become increasingly pronounced in recent years. Despite rebounding bottom lines for many corporations, a new ITEP report, 3 Percent and Dropping: State Corporate Tax Avoidance in the Fortune 500, 2008 to 2015,finds that effective tax rates paid by profitable Fortune 500 corporations are declining. In fact, since our last study (in 2014) those rates dropped from 3.1 to 2.9 percent of U.S. corporate profits.
The corporate income tax matters to states’ bottom lines and to the overall progressivity of states’ tax systems. In years like this one when more than half of all states face revenue shortfalls and lawmakers across the country are promoting lopsided “tax reforms” that would fall on states’ lower-income residents, it is particularly important for lawmakers to scrutinize the impact of corporate tax avoidance on their state budgets.
In practice, however, 3 Percent and Dropping finds that the opposite is happening. This report comes at a time when lawmakers in a number of states (including Louisiana, Oklahoma, and West Virginia) have considered outright repeal of their state corporate income taxes, and when several other states (including Arizona, Illinois, Indiana, Mississippi, New Mexico, North Carolina, and the District of Columbia) have moved to cut their corporate tax rates.
A variety of policy decisions are driving this decline. In addition to state tax rate cuts, states are providing “incentives” for companies to relocate or stay put. Consider the deal supposedly brokered by President Trump with Carrier in Indiana that included significant state tax breaks. If you think these incentives are too good to be true, they are. A recent New York Times story reported that Carrier did indeed keep some jobs in Indiana after the deal (roughly 800), but still more than 600 people will be out of work. And, there’s a real question about how much the state paid in breaks to retain each job. Blatant manipulation of loopholes by corporate accountants and the continued erosion of state corporate tax bases as a result of ill-advised linkages to the federal tax system also contribute.
States can take steps to strengthen the corporate income tax to ensure that the biggest, most profitable corporations pay their fair share. For more on the steps states can take, read 3 Percent and Dropping.