Recession has strong impact on state, local business taxes

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The recession has had a huge impact on state and local business tax collections, according to findings of a study prepared by Quantitative Economics and Statistics Practice (QUEST) of Ernst & Young LLP in conjunction with the Council on State Taxation (COST). This decline has legislators scrambling to fill huge budget gaps by raising taxes and reducing government spending.

According to the study, businesses paid $590 billion in state and local taxes in 2009, a decline of 3.5 percent from 2008. Taxes that saw the biggest decline? Individual income taxes on business income. This tax reported a decrease of 14.1 percent or $32.3 billion in 2009, compared with $37.6 billion in 2008. Corporate income taxes also reported a significant decrease. In 2008, corporate income taxes accounted for $58.1 billion, and only $50.6 billion in 2009, a decrease of 13 percent.

In addition to corporate income taxes and individual income taxes on business income, other taxes paid by businesses to state and local governments include property taxes on business property, business and corporate license, and public utility taxes. These three taxes were the only ones to report an increase. Property taxes on business property increased 2.7% in 2009, to $215.3 billion. Property taxes make up 36.5% of total state and local business taxes, the largest percentage. Business and corporate license, and public utility taxes increased 2.3 percent and 2.9 percent year over year, respectively.

State and local business taxes have declined as a share of total economic activity during the recessions of 2001 and 2007, according to the study. Following the 2001 recession, business taxes dropped 4.61 percent, nearly the same percentage following the 2007 recession during the period from 2007 through 2009. On the positive side, business taxes relative to economic activity tend to rise significantly over the coming fiscal years as the economy improves.

Though the corporate and individual income taxes already have been affected by the recession, the study projects increases to unemployment taxes in 2010 and 2011. During the recession, the U.S. economy lost approximately 8.4 million jobs, with the largest decline between November 2008 and April 2009. The surge of unemployment has depleted state unemployment insurance (UI) funds and increased state borrowing from the federal government.

Overall, the study concluded that based on historical trends, there will be significant upward pressure on UI taxes over the next two years. More importantly, states that experienced a large decrease in revenue in 2009 might be faced with another shortfall in 2011.

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