63% of State’s Corporations Pay No Taxes

A new study by the Economic Policy Institute shows that the effective state and local tax rate on corporate profits shrunk by between a third and a half between 1989 and 2017. This has a resulted in a revenue loss “estimated to be at least $43 billion and possibly as high as $57 billion.”

In Wisconsin, the study found, 63% of corporations paid zero taxes over the five years from 2015 through 2019.

“This erosion in corporate taxes does not stem from any reduced ability to pay from corporations—profits have been extremely strong for decades, and even during the pandemic,” the study found. “Indeed, corporate profits have risen even as corporate tax revenues have declined.” In Wisconsin some of the wealthiest companies are paying no corporate taxes: 20% of corporations in the state with more than $1 billion in taxable income paid no taxes during the five-year period.

“In recent decades state and local policymakers have consistently allowed corporations to reduce their share of taxes,” the study notes. “The decline can be traced to a combination of state corporate income tax cuts, a rise in the share of corporate profits earned by S-corporations, which are exempt from most state corporate income taxes, and the ability of large, profitable corporations to exploit loopholes that allow them to minimize their tax bills.”

In Wisconsin former governor Scott Walker and the Republican Legislature passed the Manufacturing and Agriculture Tax Credit, under which a company can reduce a corporate tax rate of 7.5% to nearly zero: 0.4%. Republicans argued that the tax credit was targeted to “job creators,” who would funnel those savings into job creating enterprises. In fact the tax credit had no impact on jobs, as Urban Milwaukee’s Data Wonk found. But it had a huge impact on state revenue, creating an annual loss of $338 million, which is likely to grow in the coming years.

“The growing erosion of state corporate income taxes has been a prime source of revenue weakness,” the new study noted, reducing the ability of states to provide services to their citizens, including “educating children; maintaining roads, bridges, and other transportation networks; ensuring public order and safety; monitoring public health; and providing clean water.”

While much of federal spending is for the military and transfer payments for Social Security and Medicare, state and local governments “perform most of the basic functions of the public sector in the U.S.,” the study notes. In 2019, state and local governments employed about 19.8 million workers, compared with 2.8 million in the federal government (not including the military). “State and local public-sector workers include teachers, social workers, school nurses, child care and elder care providers, sanitation workers, and those who repair our roads, among a multitude of other jobs.”

“The ‘effective’ corporate income tax rate levied by state and local governments shrank from 5.2% in 1989 to 2.6% in 2017, a reduction of just under 50%,” the study found. And that reduction came despite record profits for corporations: “Pre- and post-tax profit margins have been extraordinarily strong since 2000 as corporate income tax revenue has declined as a share of overall revenue.”

And that loss in revenue was not made up elsewhere, but led directly to less spending on state services: “every $1 in reduced revenue was correlated with an $0.88 reduction in state spending.”

In Wisconsin the impact can be seen in deteriorating roads and bridges, inadequate child care, a teacher shortage and declining aid and rising debt for students attending universities. Not to mention huge cuts in state shared revenue to cities and counties. Less corporate tax revenue means there is less revenue to share.

Besides the cuts in taxation of traditional corporations, the other trend reducing taxes paid is the rise of S Corporations, which are exempt from most corporate taxes. “In 1979, S-corporations accounted for 5% or less of total corporate profits, but by 2019 this share had risen to roughly 35%.”

But that change was not inevitable, the study notes. Originally, the restrictions on S corporations made them less attractive to most business owners, but many states have loosened the rules for S corporations, which has led directly to their rise and the accompanying loss of tax revenue for states.

The beneficiary of the corporate tax reductions are mostly wealthy people the study notes, while average workers do not benefit. In short, the trend also helps drive the growing wealth gap in America. That, too, can be seen in Wisconsin. A 2018 report by the nonpartisan Legislative Fiscal Bureau found that 79% of the Manufacturing and Agriculture Tax Credit benefitted individuals with an income of more than $1 million, and 21 individuals with an adjusted gross income of $30 million or more a year received $38.9 million in tax breaks.

It is striking to read the new EPI study and the way it patiently, methodically documents something that has been obvious for decades: trickle-down economics increases the wealth gap and an inadequately funded public sector results in inadequate public services.