Federalism

New Study Shows State and Local Business Taxes on the Rise

The Council on State Taxation (COST) recently released a study revealing that businesses paid a total of $644 billion in state and local taxes in fiscal year 2011 – up from $616 billion in fiscal year 2010. State and local taxes on businesses increased by 4.5% during fiscal year 2011, after falling by 0.6% in fiscal year 2010.

COST’s study focuses on 10 different types of taxes affecting business. Most would expect corporate income taxes to account for the largest tax burden on businesses; however, in fiscal year 2011, corporate income taxes made up just 7.2 percent of taxes on business. Whereas taxes on business property accounted for 38 percent, the largest portion, and general sales tax on business inputs accounted for 20 percent, the second largest portion. While these taxes represent most of the tax burden on businesses, the study concludes that revenue increases in fiscal year 2011 came from increases in unemployment insurance taxes, health care provider taxes, natural resource severance taxes, and individual income taxes on pass-through business income.

The study also found that taxes on pass-through business income grew by approximately 10 percent in fiscal year 2011. The increase in revenues was a result of higher overall profitability and an increased number of businesses operating as limited liability companies, partnerships and S-corporations.

Even though taxes on pass-through entities have the potential to generate substantial revenues, some states have decided that capital is best left in the hands of business owners. In May 2012, for example, Kansas Governor Sam Brownback signed a bill that eliminated taxes on non-wage income for pass-through businesses. The Governor’s office reports that the new policy will eliminate income taxes for 191,000 firms, relieving a substantial burden on small businesses.

COST’s study sheds light on the overwhelming obstacles that states place upon businesses in the form of taxes. While many states like Kansas are making serious efforts to reduce this burden, many other states still have work to do.


In Depth: Federalism

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