Even as states cut services because of tight budgets, they are forgoing billions of dollars in revenue that they could be collecting from big, profitable corporations — some of which have paid little or no state corporate income taxes over the past three years, according to a new report.
DuPont, Intel, Goodrich and International Paper are among the Fortune 500 firms that paid no net state taxes on their income between 2008 and 2010, according to the study
. The report, released December 7, was the work of the Institution on Taxation and Economic Policy and Citizens for Tax Justice, a pair of Washington-based think tanks that advocate for more progressive tax systems. Dozens of other companies did not pay state corporate income taxes in at least one of the three years examined, the study finds.
The two research groups examined annual financial reports from 265 of the 280 profitable firms on the Fortune 500 list and found that, on average, the companies paid taxes equivalent to about 3 percent of their domestic profits. That is less than half of the 6.2 percent average state corporate income tax nationally. If the full 6.2 percent rate had been applied to these firms' $1.33 trillion in U.S. profits over the three years examined, states would have collected $83 billion. Instead, they collected less than half that amount.
The study sees three main reasons for what has been an ongoing decline in state corporate income tax collections: the common practice of states pegging their tax codes to the federal government's; the proliferation of state-level tax credits granted to individual companies or whole industries; and crafty accounting maneuvers that allow companies to avoid or reduce their state tax obligations.
"Piggybacking" on the federal tax code — by using the same definition of "taxable income" that the federal government employs, for instance — allows states to simplify their own process of collecting taxes. The tradeoff, according to ITEP and CTJ, is that "every new corporate loophole that gets tucked into the federal code will also erode the state tax base."
"Even if these federal tax breaks, many of which are ostensibly designed to encourage business investment, are having an effect nationally," the study says, "it makes little sense for any state to piggyback on a tax cut that could encourage investment anyhere in the United States."
Beyond federal credits that automatically find their way into state tax codes, states have approved a plethora of their own corporate tax breaks. These can help individual companies — Sears, for example, has been angling for a tax-break package in Illinois — or whole industries. Some states have gone further: Michigan this year approved a wholesale revision
of its corporate income tax, reducing the liability for companies around the state.
Meanwhile, big corporations with many subsidiaries have also avoided state taxes by using accounting maneuvers that shift profits "from the states in which they are actually earned into states that tax them at lower rates or not at all," the study finds. The report notes that, since 2004, seven states have banned this practice by treating companies and their subsidiaries as one corporation, collecting taxes on their combined profits.
While the ITEP/CTJ study examines state corporate income taxes, it leaves out several other important state-based taxes that businesses pay, as another research and advocacy group, the Council On State Taxation, points out
. The group, which represents more than 600 multi-state corporations, notes that these levies include franchise, net worth, capital stock, gross receipts and excise taxes — which collectively bring in a far bigger tax haul for states than corporate income taxes do.