April 2002

The Disappearing State Corporate Income Tax

In state legislatures across the nation, lawmakers are scrambling to cope with revenue shortfalls. Increasingly, however, they cannot look to the corporate income tax for much help. In a recent article in State Tax Notes, Peter Fisher of the University of Iowa argues that tax incentives have played a key role in shrinking the revenue from state corporate income taxes.

"Incentives at the state level do not pay for themselves," Fisher contends. "In fact, they are quite costly." Since 1980, the share of state revenue coming from corporate income taxes has slipped from 9.7% to 6.2%. Even without the enactment of new incentives, Fisher predicts, corporate tax revenues will continue this decline as more firms take advantage of existing incentives

. In a related State Tax Notes article, Kirk J. Stark of the UCLA School of Law asserts that state taxation of corporate income is "simply untenable," observing that "Not much can be said for a costly tax that doesn't raise much money."

Over time, Stark explains, the decentralized decisions of corporate managers and politicians have transformed the tax into something it was not intended to be: a type of gross receipts tax rather than an income tax in the traditional understanding of the term. Stark suggests that if policymakers want to preserve the corporate income tax, Congress should assign it to the federal government, with lawmakers possibly devising a revenue-sharing arrangement between the federal government and the states.