By Jonathan Liss

I’m sure you’ve heard the claim that U.S. corporations do not pay their fair share of taxes. It can be an effective flag to rally around, but what exactly constitutes a “fair share”? Does this mean a certain dollar amount of taxes, or a minimum percentage of profits, or something else entirely? I will attempt to briefly address the question of “fair share,” although it won’t be easy because, as often as not, a corporation’s fair share is in the eye of the beholder.

Before embarking, it is imperative to understand that corporations and other business entities are subject to many different taxes. Discussions of a corporation’s fair share, though, tend to focus on the federal income tax. Often omitted from the public discourse is the fact that many large companies have a significant state and local tax burden. In some cases, these exceed the company’s federal income tax liability. Businesses paid more than $839 billion in state and local taxes in fiscal year (FY) 2020, an increase of 0.5% from FY 2019. In FY 2020, business tax revenue accounted for 44.3% of all state and local tax revenue.¹  

Multistate corporations are required to pay state and local taxes in every taxing jurisdiction in which they do business. These taxes may include the following:  

• Income taxes
• Franchise taxes based on net worth
• Sales and use taxes
• Personal property taxes
• Real property taxes
• Gross receipts taxes
• Employment taxes
• Excise taxes
• Business and corporate license taxes
• Unemployment insurance taxes

It should be noted that the corporate income tax as a revenue source has declined sharply since the 1950s. In recent years, to avoid double taxation, more and more U.S. businesses are instead have opted to be pass-through entities – partnerships, S corporations, and limited liability companies – which are not taxed via the corporate income tax.  

Most economists concluded long ago that the corporate income tax is among the least efficient and least defensible taxes. Although they have trouble agreeing on – much less measuring with precision – who actually bears the burden of the corporate income tax, economists agree that it causes significant distortions in economic behavior.² Assessing the incidence of the corporate income tax – on which groups of people the burden falls – is a matter of serious debate.  

From a state and local tax perspective, corporate income taxes represented 8.5% of all state and local business taxes for FY 2020.³ The trend for businesses to operate as pass-through entities continues to shrink the corporate tax base. In fact, individual income taxes paid by owners of pass-through entities totaled an estimated $50.4 billion in FY 2020, representing 6.0% of total state and local business taxes.⁴

Considering that corporate income taxes make up a relatively small portion of state and local tax revenues, some have wondered whether the states should impose the tax at all. It fails to achieve some of the rationales used to justify its imposition and, in terms of compliance and administration, the corporate income tax is a complicated and expensive business tax to administer.⁵  

Several states have reduced their corporate income tax rates or are phasing in rate reductions over time. Pennsylvania, for example, will reduce its corporate net income tax rate from 9.99% to 8.99% in 2023, and then will phase down each year by 0.5% until reaching 4.99% in 2031.⁶   

Twenty-nine states and the District of Columbia have single-rate corporate tax systems. The greater propensity toward single-rate systems for corporate tax than individual income tax is likely because there is no meaningful “ability to pay” concept in corporate taxation.⁷

A continued emphasis on the corporate income tax is probably shortsighted when assessing the tax burden of multinational businesses and whether they are paying their “fair share” of tax. In this blog, I’ve attempted to explain that U.S. businesses in all industries are subject to many different types of taxes at the federal and subnational levels, not just the corporate income tax. In analyzing U.S. corporate tax obligations, it is not “fair” to focus entirely on the corporate income tax.

¹ Total State and Local Business Taxes: State-by-State Estimates for Fiscal Year 2020, Ernst & Young LLP.
² Rob Norton, The Library of Economics and Liberty. 
³ Total State and Local Business Taxes: State-by-State Estimates for Fiscal Year 2020, Ernst & Young LLP.
⁴ Ibid.
⁵ David Brunori, State Tax Policy (Fourth Edition), Chapter 7 and Chapter 2.
⁶ House Bill 1342 (Act 53 of 2022). 
⁷ Tax Foundation – State Corporate Income Tax Rates and Brackets for 2022 (Jan. 18, 2022).

Jonathan Liss is senior revenue policy analyst for the Philadelphia Department of Revenue. He is also an adjunct professor at Drexel University, Temple University School of Law, and Villanova University School of Law. He can be reached at jonathan.liss@phila.gov.

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