State corporation income taxes don't work. Iowa's corporation income tax has the highest rate in the country, but it contributes only about $366 million to the state's $6 billion in tax revenues.
State tax expert David Brunori wonders why the states bother:
It's not the fault of departments of revenue. Their staffs do Herculean work against well financed adversaries. But no amount of enforcement dollars will change the fact that the state corporate tax laws do not work. And truth be told, they never will.
The tax does not raise a lot of revenue, a mere $36 billion (out of $1 trillion of state revenue) in 2010. But it consumes an inordinate amount of resources. So we cannot say we impose the tax to raise revenue. There are better ways to do that. The corporate tax laws reward companies for building and investing in the state. That may be a good thing. But it belies the argument that the corporate tax is designed to make companies pay for government services. And we are not ever sure who pays the tax. There is an increasingly influential school of thought that says the tax is borne by labor in the form of lower wages. If that is true, the tax can hardly be said to increase progressivity.
I think it's for show. Politicians want to say they are sticking it to the big bad corporations, to assure the people who are really paying the bills with their sales taxes and property taxes that they are also going after the fat cats. Never mind that it's futile and inefficient; it's the show that counts. It's like airport security that way.
In Iowa the contingent liability for tax credits -- things like economic development subsidies, research credits and historic building credits -- was $362.7 million for 2012. That's almost the same amount as the net take from corporate taxes. Getting rid of both would do more for Iowa's economy -- and the "bottom 99% -- than the tax credits and corporate tax ever will. But the usual caring suspects will bulldoze an Occupy encampment before they will let those evil corporations stop paying income taxes.
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to