By taxing corporate owners, an effective corporate income tax has two large advantages for states: the majority of owners are in the richest 1% of the population, and many are not state voters. Corporate income taxes are often the main tax that out-of-state corporations and their shareholders pay for the public benefits enjoyed by their companies.
One reason social services face funding crises is that state corporate income tax revenues have dropped from 9.7% of all state taxes in 1980 down to just 5.7% by 2000. A 2005 study by Citizens for Tax Justice found that 252 of America's largest corporations failed to include two-thirds of their U.S. profits on state tax returns, avoiding an estimated $41.7 billion in state corporate income taxes over three years.
States are increasingly using a variety of tools to have corporations pay their share:
- State PIRGS, Close Corporate Tax Loopholes
- Institute on Taxation and Economic - Policy Guide to Fair State and Local Taxes: Corporate Income Taxes
Combined Reporting: States are increasingly requiring companies to use combined reporting, listing profit reports for all subsidiary companies together on state tax forms to prevent shell games where companies hide profits through phony transactions among different corporate entities.
To give one example, Wal-Mart alone may have avoided $2.3 billion in state taxes between 1999 and 2005 by gaming the tax system-- something combined reporting can shut down. The key to many of the tax evasion strategies used by Wal-Mart, like many other companies, was to manipulate the reporting of national profits and expenses by reporting them in different states-wherever would minimize the taxes owed. The end result was that instead of paying the 6.9% average tax on corporate profits paid by most companies to state authorities, Wal-Mart paid only half that rate.
At least eighteen states now have enacted "combined reporting" rules that require corporations to aggregate all profits from those separate subsidiaries and then pay a specific portion of those profits to a state -- an approach the Supreme Court affirmed in Barclay's Bank PLC v. Franchise Tax Bd.
- Institute on Taxation and Economic Policy - Combined Reporting of State Corporate Income Taxes: A Primer
- Multistate Tax Commission - Model Statute for Combined Reporting
- Center on Budget Policy & Priorities - Growing Number of States Considering A Key Corporate Tax Reform
Decoupling: States can save revenue by refusing to automatically grant special interest tax breaks handed out by the federal government --"decoupling" their tax code from the feds. For example, at least 23 states would save $1.7 billion in revenue if they refuse to implement the "bonus depreciation" corporate tax break put into the recent federal stimulus package. Similarly, some states have already rejected one particular federal loophole, the "Qualified Production Activities Income" (QPAI) deduction, because it threatens to cost states over $1 billion per year as it is phased in.
- Center on Budget Policy & Priorities - How States Can Avoid Revenue Loss From Federal Stimulus
- Center on Budget Policy & Priorities - Protecting State Revenue By Decoupling from Federal Tax Legislation
Oil windfall taxes: A number of groups have advocated state Windfall Profits Taxes to capture the outsized oil company profits. Such a tax could raise billions for state coffers -- $500 million per year for the state of Washington alone, according to the Economic Opportunity Institute. These revenues could then be used to offset many of the environmental costs of fossil fuel use.
- Legislators in Washington State gave the oil windfall profits tax idea national attention when legislators sponsored HB 1510, which called for using windfall oil profits to mitigate energy costs for state residents and fund state investments in renewable energy.
- Wisconsin Governor Jim Doyle proposed taxing big oil companies to help pay for the state's transportation needs. The tax would equal $1.50 per barrel of oil sold in the state, and more importantly, the companies would be prohibited from passing the tax onto customers by raising the price of gas at the pump. The Wisconsin Department of Revenue would also have the authority to audit the oil companies' earnings. If the department finds that the tax is resulting in higher fuel prices, the offending company would be subject to fines in the amount of the gains resulting from the price increase, or up to six months in jail.
- Pennsylvania Governor Ed Rendell also proposed taxing oil company profits to help fill the state's transportation gap. His proposal would tax oil company businesses operating in the state at a rate of 6.17% on gross profits, providing $760 million a year for public transit systems. Governor Rendell pointed out that Exxon Mobil's 2006 profit of $39.5 billion was almost 50% greater than the entire Pennsylvania state budget.
Similar proposals have been debated in New York and New Jersey.
- Progressive States Network - Taxing Big Oil's Windfall Profits
- WA House Bill 1510 - providing for the community reinvestment of oil windfall profits
- Doyle Seeks to Tax Big Oil Firms
- Pennsylvania Governor Plans Oil Profits Tax to Fund Transport
- Economic Opportunity Institute - Redirecting Windfalls for a Renewable Energy Future and a Sustainable Transportation Policy