Businesses continue to face excessive taxation

The Council on State Taxation (COST) recently released its 11th annual report on business taxation, revealing that businesses paid a total of $649 billion in state and local taxes in fiscal year 2012—an increase of 3.9 percent from fiscal year 2011. Total state business taxes increased by 5.8 percent from fiscal year 2011, while local business taxes grew by 1.7 percent. As a share of total state and local tax revenues, business taxes remained relatively unchanged from fiscal year 2011 at 45.2 percent of revenues.

As studies by COST have highlighted in the past, most would expect corporate income taxes to account for the largest tax burden on businesses. Despite this perception, corporate income taxes made up just 7.6 percent of taxes on business in fiscal year 2012. Total revenues from the corporate income tax also remained relatively flat, despite rate increases in some states, such as Connecticut and Illinois. Taxes on business property accounted for 35.3 percent, the largest portion, while general sales taxes on business inputs accounted for 21.2 percent, the second largest portion.

Another surprising result from the study is the sharp increase in unemployment insurance taxes for fiscal year 2012, with total collections growing to $48.4 billion—a 17 percent increase from fiscal year 2011. States such as Hawaii experienced a 49 percent increase in unemployment insurance tax collections, while Oklahoma more than doubled its collections.

Despite these disturbing trends, some states chose to promote economic growth by reducing the tax burden on businesses during fiscal year 2012. For example, Michigan eliminated its onerous Michigan Business Tax and replaced it with a 6 percent flat corporate income tax—reducing business tax collections by $1 billion in the process.

Overall, COST’s study reveals that businesses continue to face significant tax burdens, especially at the state and local levels. These burdens are ultimately borne by individuals. If they are not absorbed by the businesses themselves, where they reduce returns and wages for owners and employees, they are passed on to consumers in the form of higher prices.

The wide variety of taxes examined in the study also sheds light on the complexity of the tax code faced by entrepreneurs. Several states have taken steps to reduce the burden of taxation on business, but others continue to contribute to the problem. High tax states will ultimately be forced to correct bad policies as entrepreneurs continue to vote with their feet—taking jobs and capital with them.

 

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