Business Income Taxes

Source: National Conference of State Legislatures, 2013

…State reliance on corporate income taxes as a revenue source is declining. Reliance peaked at 9.7 percent of state tax collections in the late 1970s and has steadily dropped since then. It is now the smallest source of state revenues of all the major tax categories, providing just 5 percent of state own-source revenues in fiscal year 2012.

Several factors may be responsible for the decline in the share of state revenues from corporation income taxes. First, as mentioned above, more states are using apportionment formulas that weight sales more heavily. This allows interstate firms to legally avoid taxation on some income. Second, states have expanded the use of credits, incentives and abatements to lure businesses and create jobs. The cumulative effect of these provisions may be eroding overall corporation income tax collections in relation to other taxes. Finally, is the popularity of pass-through entities. Sole proprietorships, partnerships, S corporations and LLCs are considered pass-through, or flow-through, entities because the income of the entity flows through the business to owners or investors. As such, profits from these entities are taxed as ordinary income of owners (through the personal income tax) instead of as a corporate entity. …