U.S. businesses paid $671 billion in total state and local taxes in fiscal year 2013, according to an annual study prepared by Ernst & Young in conjunction with the Council on State Taxation that was released today.
State business taxes grew 4.7 percent compared to local tax growth of 3.7 percent, representing the third consecutive year of growth for both categories, according to the study, which was released today. In FY 2013, business taxes accounted for 44.9 percent of all state and local taxes. While this is the lowest share of total state and local taxes since FY2006, the business share has remained relatively stable and peaked at 45.7 percent in FY2007, less than one percentage point different from the current share.
“The change in business taxes suggests relatively broad, yet still gradual, economic recovery,” said Andrew Phillips, a principal in Ernst & Young LLP’s Quantitative Economics and Statistics group (Quest) and director of the firm’s Regional Economics practice. “We saw most categories of business taxes rise in FY2013. In most states, increases were due to growth in property values, business incomes, and transactions subject to the sales tax.”
“The study is significant,” Douglas Lindholm, president and executive director of COST, “because it allows policymakers to evaluate state and local business tax burdens beyond corporate income taxes, and provides a truer picture of business tax burdens than commonly perceived.”
The study found that businesses continue to pay more in state and local taxes than governments spend on services that benefit businesses. On average, businesses paid $3.26 for every dollar of government spending benefiting businesses, assuming that education spending does not benefit local businesses. An alternative assumption, that half of education spending benefits local businesses, still results in businesses paying 20 percent more in taxes than the cost of state and local government spending benefiting business.
Other key findings include:
- After three straight years 0f growth rates below 1 percent, business property taxes increased 37 percent in FY2013, a gain of $8.5 billion. Property taxes remain by far the largest state and local tax paid by businesses, accounting for 36..1 percent of the total.
- General sales taxes on business inputs and capital investment totaled $139.8 billion, or 20.8 percent of state and local business taxes. While state sales taxes increased 3.8 percent, general sales taxes paid by businesses remained flat at the local level.
- In FY2013, state and local corporate income tax collections were $53.3 billion, or 7.9 percent of all state and local business taxes. FY2013 marked the third consecutive year of corporate income tax growth. While overall state and local corporate income tax collections grew in FY2013 by 8.4 percent, the corporate income tax has been the slowest of the major types of business taxes to return to pre-recession levels. In FY2013, state and local corporate income tax collections were still nearly 13 percent below the prior peak that occurred in 2007.
- Individual income taxes on pass-through business income accounted for 5.5 percent of total state and local business taxes. Individual income taxes on business income grew 13.2 percent, the highest rate of any tax in FY2013.
- Twelve states have still not returned to their prior highs for business tax collections reached near the start of the last recession. The corporate income tax has been the slowest to rebound, with 28 of the 47 states that levy some form of corporate income tax not yet returning to their prior peak level of collections.
“Given growth in state and local tax bases, many states adopted reductions in business taxes in 2013 and 2014 designed to encourage economic growth,” said Lindholm. “It will be interesting to see how this impacts the states’ budgets in the coming year.”