Working Paper Number
Between 1995 and 2000, inflation-adjusted federal corporate income taxes grew an average of 2.0 percent a year; the annual average for state and local corporate tax revenue actually declined by 0.12 percent during the same period. A number of statelevel studies have documented this decline by showing that corporations are paying a declining share of state taxes. But such results are inconclusive because they do not control for changes in corporate profitability. In this paper we use data from the National Income and Product Accounts to create a time series of corporate profits by state, enabling us to investigate corporate income taxes while controlling for corporate profits. Our findings are striking: out of the 42 states studied, 41 show a statistically significant decline in their effective corporate income tax rates between 1991 and 2001. The average decline for all states is 4.6 percent per year, which means that effective corporate income tax rates fell by a little over one-third over the decade of the 1990s and into 2001. After accounting for the impact of the growth in income of S corporations, this means that states lost about $11 billion on corporate income tax revenue in fiscal 2002 due to the decline in effective corporate income tax rates.