Measuring the burden of US business taxes

May 2, 2013

In the US, state business tax receipts have increased, while local ones have edged down, according to an Ernst & Young report.

The recession that began in December 2007 resulted in significant declines in US state and local tax revenues, from which states have largely recovered in the past fiscal year.

The report Total state and local business taxes: state-by-state estimates for fiscal year 2011 (FY2011) sets out estimates of the state and local taxes paid by US businesses across a wide range of taxes. The FY2011 study is the 10th annual report on this subject prepared by Ernst & Young’s Quantitative Economics and Statistics (QUEST) practice in conjunction with the Council on State Taxation (COST).

Key findings of the study include:

  • After falling by 0.8% in FY2009 and 0.6% in FY2010, state and local business taxes grew US$27.9 billion (4.5%) in FY2011, with total state business taxes increasing by 9.8% and total local business taxes declining by 0.8%. Property taxes on business property decreased by an estimated 1.5% this year, totaling US$244.9 billion in FY2011, or 38.0% of total state and local business taxes. Sales tax on business inputs and capital equipment totaled US$129.7 billion, or 20.1% of business taxes, which is an increase of 5.2% from FY2010. The property tax and a significant portion of sales taxes paid by business are taxes on capital invested within a state.
  • Although the corporate income tax has been the focus of significant debate in a number of state legislatures during recent years, FY2011 collections were US$46.3 billion, only 7.2% of total state and local business taxes. Corporate income tax collections grew by 8.5% in FY2011. Individual income taxes on pass-through business income account for 5.6% of total state and local business taxes and grew by 10.0% in FY2011.

Total state and local business taxes in FY2011

Property taxes: The report indicates that property taxes on real, personal and utility property owned by businesses account for the largest share of total state and local business taxes, 38.0% or US$244.9 billion. Property taxes decreased 1.5% in FY2011, after growing 1.3% in FY2010 and 10.5% in FY2009. Typically, the local property tax is a stable source of tax revenue growth for local governments, but decreased in FY2011 due to declining property values.

Sales and use taxes: Sales and use taxes paid by businesses on purchases of inputs, including capital equipment, totaled US$129.7 billion, or 20.1% of all state and local business taxes. Sales and use taxes collected on sales to final consumers are excluded; only the taxes paid on businesses’ operating inputs and capital equipment purchases are included in the total business tax estimates.

Corporate income taxes: Corporate income tax collections were US$46.3 billion in FY2011, an increase of 8.5% from FY2010. This increase in corporate income tax receipts in FY2011 follows a decrease of 8.5% in FY2010. Corporate income taxes accounted for 7.2% of total state and local business taxes in FY2011, up from 7.1% in FY2010.

Unemployment insurance: Employer contributions to unemployment insurance (UI) (unemployment taxes) were US$41.2 billion in FY2011, an increase of 27.1% (US$8.8 billion). This increase accounts for nearly one-third of the overall increase in total state and local business taxes in FY2011. State unemployment trust funds have been depleted by the recession, and states are facing large debts to the federal government for loans used to pay unemployment benefits. States have responded to this fiscal pressure by increasing taxable wage bases and contribution rates, resulting in increased effective UI tax rates in 43 states since 2010.

Excise taxes: Excise taxes paid by business were an estimated US$35.0 billion in FY2011. Excise taxes attributed to business include a portion of motor fuel taxes and other excise taxes, such as taxes on hotel and rental car expenditures by business, as well as health care provider taxes on the revenue of hospitals and other providers of health services. Health care provider taxes have grown rapidly over the past two years in response to increased state Medicaid funding pressures. Total estimated excise taxes, which include health care provider taxes, grew by 14.9% in FY2011. These estimates exclude excise taxes on tobacco, alcoholic beverages, amusements and pari-mutuels, which are allocated entirely to households.

License taxes: Business and corporate license taxes totaled US$37.3 billion, including US$27.2 billion of general business and occupation license taxes and US$10.1 billion of motor vehicle taxes.

Individual income taxes: Individual income taxes paid by owners of pass through entities (e.g., partnerships, sole proprietorships, limited liability companies and S-corporations) totaled an estimated US$36.3 billion in FY2011. Individual income taxes on pass-through business income were more than three-quarters the size of corporate income taxes and represent 5.6% of total state and local business taxes.

Insurance premium and public utility taxes: Taxes on insurance premiums and public utility gross receipts totaled US$46.0 billion in FY2011, an increase of 1.1% due to increased insurance premium tax collections. These taxes are generally based on business gross receipts, and because they are generally levied in lieu of property or corporate income taxes, they are allocated solely to business.

Severance taxes on natural resources: Severance taxes are imposed on natural resource industries in 35 states and include taxes on oil, natural gas, mining and other extractors of natural resource. State severance taxes grew by 30.9% to US$14.8 billion in FY2011. The increase in severance taxes was US$3.5 billion, or 13% of the overall increase in state and local business taxes.

Conclusions

Total state and local business taxes increased by 4.2% in FY2011, signaling a return to growth after two fiscal years of declining revenues. In contrast to previous economic cycles, which were marked by stable local property tax collections, the current recovery has been accompanied by declining property taxes.

Local governments, which rely significantly on the property tax, are generally unable to diversify their revenue mix and will likely be forced to confront stagnant revenue growth in the near future.

At the state level, many of the revenue sources tapped for growth during FY2011 are special-purpose taxes on specific industries or used to fund specific activities and may not be sources of long-term revenue growth.

The full version of this article was first published in the Ernst & Young Indirect Tax Briefing, Issue 6, December 2012 (pdf, 4.96 MB)

Read more: Total state and local business taxes: state-by-state estimates for fiscal year 2011 (FY2011)

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