States lose revenue to tax shelters, investment incentives

Thursday, February 3, 2005

WASHINGTON -- Some of the country's biggest corporations used shelters and investment incentives to pay little or no state income taxes from 2001 through 2003, private groups reported Wednesday.

Citizens for Tax Justice and its Institute on Taxation and Economic Policy looked at 252 companies that reported profits during those three years and found that 71 paid no state income taxes in at least one year, and 25 paid no tax in multiple years.

"The data in this report show in stark terms just how successful large, multistate corporations have become at shirking their tax responsibilities to state and local governments," wrote Robert McIntyre, director of Citizens for Tax Justice, a liberal advocacy group.

"As a result, individual taxpayers and purely in-state [usually smaller] businesses are paying a heavy price, in the form of higher taxes, reduced public services and unfair competition."

Given an average state tax rate of 6.8 percent, the study said the corporations should have paid $67.1 billion in taxes on almost $1 trillion in profits reported to shareholders. The businesses instead paid only $25.4 billion.

Dan Mitchell, a senior fellow at the conservative Heritage Foundation, said the study erred by focusing on profits reported to shareholders, not income considered profits under tax laws. The two can differ substantially because of rules that force businesses to write off expenses and investments over several years, he said.

"They're playing games, cherry picking companies," Mitchell said. "Having said that, there are plenty of stupid provisions in the tax code."

The study said states lose income when they go along with federal income tax cuts. Tax shelters and special incentives designed to lure businesses into states also undercut tax income.

McIntyre suggested states detach themselves from the federal income tax system and stop giving special incentives to lure business investments.

"States need to stop giving away corporate taxes in the name of economic development," he wrote. "States should get together and agree to stop this futile, destructive competition."

Chris Edwards, director of tax policy studies at the libertarian Cato Institute, agreed that states lose money to the shelters and incentives described in the report.

"I would agree that the state tax competition, I've got to say, has a good side and a bad side," he said.

Instead of forcing more income tax out of companies, Edwards said states should give up corporate income taxes altogether.

"It's really getting almost impossible for states to collect this kind of tax," he said. "It's really not worth the effort."

On the Net:

Citizens for Tax Justice:

Institute on Taxation and Economic Policy:

Heritage Foundation:

Cato Institute:

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