Why do those mean people at the Citizens for Tax Justice and the Institute on Taxation and Economic Policy keep picking on American corporations? Just one month ago, they released a damning report pointing out how hundreds of the bluest of American blue-chip corporations were flat-out deadbeats when it came to paying their federal income taxes. But that wasn't enough. Now they're piling on with even more nasty numbers -- a breakdown of how many of those same Fortune 500 companies are also slipping out from under their state tax liability.
Bottom line: The average statutory corporate tax rate is 6.2 percent. But between 2008 and 2010, the 265 companies analyzed in the report "paid state income taxes equal to only 3.1 percent." If they had paid the full rate, states would have collected another $82.6 billion in revenues, money sorely needed to pay Medicaid bills and keep parks open and employ teachers and firefighters.
We can't repeat this enough: When you hear someone say that American corporations suffer from high taxes, take a moment to point out that, as far as taxes are concerned, it's never been better than right now to be an American corporation.
As recently as 1986, state corporate income taxes equaled 0.5 percent of nationwide Gross State Product (a measure of nationwide economic activity). But in fiscal year2010, state and local corporate income taxes were just 0.28 percent of nationwide GSP, equaling the low-water mark set in 2002. For the three years between fiscal 2009 and 2011, in fact, state corporate income taxes were at their lowest sustained level, as a share of the U.S. economy, since World War Two.
The report cites three major reasons to explain the ongoing decline in state corporate income tax revenue -- "the trickledown impact of federal corporate tax cuts, ill-advised tax 'incentives' intentionally enacted by state lawmakers, and unintended tax shelters created by companies armed with creative accounting staffs." The report also proposes a sheaf of well-meaning, sensible policy responses and strategies for reversing the trend. But ultimately, the proposed fixes all run head on into exactly the same political reality that any attempt to rationalize the federal income tax debacle faces: at the congressional level, politicians are still attempting to reduce corporate tax liabilities.
Earlier this year, the House Judiciary Committee approved H.R. 1439, the so-called “Business Activity Tax Simplification Act” (BATSA), which would make it substantially more difficult for states to effectively tax the income earned by corporations from activities within their borders.
The bill’s sponsors -- and the corporate lobbyists pushing this plan -- say that the goal of the bill is to limit state and local governments to taxing only those businesses with a “physical presence” in a state.
Of course, as the authors point out, the "physical presence" standard makes no sense in the Internet age. Even worse, any corporation with accountants who know what they are doing can easily structure subsidiaries to carry out physical operations in such a fashion as to escape local taxes.
Which leads us to one final inescapable conclusion. Today, a not insignificant amount of corporate creativity and innovation is channeled directly into the task of avoiding taxes. Our patchwork system of federal and state incentives and tax breaks creates fertile ground for game-playing. In a simpler world, you would have to think that energy could be directed to more productive uses.