A Closer Examination of the Total State and Local Business Tax Burden
Corporate profits declined by 8 percent between 1999 and the middle of 2002, but state and local taxes on business rose by 6 percent over the same period. Business taxes have increased even during a time of falling corporate profitability because corporate income taxes are but one of the many taxes paid by businesses to state and local governments.
These state and local taxes include:
• Property taxes on business property,
• Sales and excise taxes paid by business (not consumers) on business purchases,
• Corporate income taxes,
• Unemployment insurance and workers’ compensation taxes, and
• Business license taxes.
In fiscal year 2002, businesses paid $378.9 billion in state and local taxes, representing 41% of total state and local taxes. Total state and local business taxes exceeded personal income taxes by 85 percent and all other state and local non-business taxes by 14 percent.
Large corporations (as represented by the Fortune 1000) provided 20 percent of private-sector jobs, yet paid 46.7% of total state and local business taxes. Combined state and local business taxes have grown significantly during the past two decades. Total business state and local taxes have increased from $113 billion in 1980 to $379 billion in FY2002, an average annual growth rate of 5.8 percent a year.
Although state and local business taxes as a whole have steadily risen, several recent studies have discussed the decline in the relative importance to state revenue systems of one of those taxes—the corporate income tax. The corporate income tax has declined in relative importance during the past two decades for a number of reasons. These include the sharp increase in capital gains taxes paid by individuals in the 1990s, plus the growth of noncorporatebusiness entities, including S corporations and limited liability partnerships, which are taxed only at the individual taxpayer level.
Due to the shift in income from C corporations to these “pass-through” business entities, a growing portion of business income tax collections are reported on individual income tax returns. Taxes paid at the individual level on pass-through business income have grown from $6.2 billion in 1980 to $41.8 billion in 1999 (the latest year data is available). The annual growth rate of business taxes, including pass-through business taxes, was 6.5 percent through 1999. Including these taxes on pass-through business income, business paid 46.1% of totalstate and local taxes.
The remainder of this study provides comprehensive estimates of the total state and local taxes paid by businesses.