How State & Local Governments Tax U.S. Businesses

By Travis H. Brown

During my book tour travels to share information about taxpayer mobility for How Money Walks, I often field the question about how our states and cities attract or discourage business investment within their community.  Lately, there has been more debate in Washington, DC and beyond about how to why to lower corporate income taxes from groups such as the United States Chamber of Commerce.

I had the occasion to join a Cato Institute workshop hosted by Chris Edwards and Richard Rahn where the topic of comparative levels of taxation on American businesses was discussed.  According to Edwards, our federal tax on corporate income generates about $300 billion a year.  While this corporate income tax rate was once thought to be competitive, other countries such as Canada or Japan have since lowered their rates relative to ours.

However, what I found interesting is just how this revenue compares with the widely-variable ways to collect taxes on businesses at the State & Local Government level.  By contrast, Edwards estimates that state and local governments collect about $640 billion a year from various business taxes in 2012.  This is based upon the Council of State Taxation’s annual survey with Ernst & Young.  This order of magnitude alone should interest most corporations regardless of their business structure.

The various modes of taxation applied to business by states and cities also varies widely.  Out of the $640 billion collected, about $245 billion is applied to property taxes.  Nearly $130 billion is collected from sales taxes applied on business purchases.  State applied taxes on corporate income amounts to $46 billion.  This leaves other various taxes collected at $223 billion.

As businesses are forced to flee from high tax regimes in favor of lower tax regimes, it seems equally important to me that state and local governments concern themselves with how their business climate appears from a standpoint of a taxing nexus.  This is true for all industries of business, not just sales & use tax conflicts with Amazon.com.

Chris Edwards also tabulated the actual growth in total state & local government spending.  In 2000, it was estimated at $1.41 trillion among the fifty states.  In 2012, it has grown to $2.31 trillion.  Despite much rhetoric of cutbacks in state & local spending, annual increases as a whole have remained steady.

As our federal government struggles to find new ways to diet, it will remain important for U.S. businesses to pay equal attention to what is happening within and across the states.