Businesses paid more than $724.1 billion in state and local taxes in FY2016

Washington, 31 August 2017

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15th Annual EY/Council on State Taxation 50 State Study shows increase of less than 1% from previous year attributable to state business tax decrease of 1.4% and local business tax growth of 3.4%

Businesses paid more than $724.1 billion in state and local taxes in fiscal year (FY) 2016, an increase of 0.9% from FY2015, according to a newly released study of state and local business taxes prepared by Ernst & Young LLP in conjunction with the Council on State Taxation (COST).

The report, “Total State and Local Business Taxes: State-by-State Estimates for Fiscal Year 2016,” shows that local business tax collections increased, while state business taxes fell from FY2015 to FY2016. Overall, state and local business taxes increased slightly, with local business tax revenue growing by 3.4% and state tax business revenue falling by 1.4%.

The annual study analyzes all state and local business taxes paid in each of the 50 states and the District of Columbia. These taxes include business property taxes; sales and excise taxes paid by businesses on their input purchases and capital expenditures; gross receipts taxes; corporate income and franchise taxes; business and corporate license taxes; unemployment insurance taxes; individual income taxes paid by owners of non-corporate (pass-through) businesses; and other state and local taxes that are the statutory liability of business taxpayers.

According to the study, property taxes remain by far the largest state and local tax paid by businesses, accounting for 38.4% of the total. Property taxes are also by far the largest local tax paid by businesses, representing 76.8% of all local taxes paid by businesses. Business property tax revenue increased 4.5% in FY2016, a gain of $11.9 billion.

General sales taxes on business inputs and capital investment totaled $153.9 billion, or 21.3% of state and local business taxes. Overall sales taxes paid by businesses increased 1.8%. For state tax only, sales taxes on business inputs are the largest paid by businesses, accounting for 31.9% of state taxes paid.

Corporate income tax collections fell for the first time since FY2010. In FY2016, state and local corporate income taxes totaled $63.2 billion, or 8.7% of all state and local business taxes, down 5.6% from 2015. Federal receipts from 2016 also show a decrease in corporate income tax revenue.

Using census data on government expenditures, the study found businesses paid $3.13 for every dollar of government spending benefiting businesses, on average, assuming that in-state education spending does not benefit in-state businesses. Using an alternate assumption, that half of in-state education spending benefits in-state businesses by completely capturing productivity from an educated workforce fully choosing to work in-state, results in businesses paying $1.11 for every dollar of government spending benefiting businesses.

“What we can see from this study is that businesses continue to pay more in state and local taxes than they receive in benefits,” said Douglas Lindholm, President and Executive Director of COST. “Unlike the Federal Government, states must balance budgets annually. This study provides valuable information for state policymakers concerned about the competitiveness of their state tax systems and how various tax proposals may impact taxpayers and tax structures on a going forward basis.”

Other key findings of the study include:

  • Employer contributions to unemployment insurance were $43.1 billion in FY2016, a decrease of $2.8 billion or 6.1% from FY2015.
  • Severance taxes decreased from $12.7 billion in FY2015 to $7.7 billion in FY2016, a decline of nearly 39%
  • State and local taxes are equal to 4.5% of the total US private-sector gross state product (GSP), which measures the total value of a state’s annual private-sector production of goods and services. There is substantial variation across states, with taxes ranging from 3.5% to 7.5% of private sector GSP.
  • Public utility tax revenue decreased by 0.9% to $26.1 billion in FY2016, the fourth consecutive year of decline.
  • Taxes on insurance premiums totaled $21.3 billion in FY2016, an increase of 6.5%.

Calculating tax-to-benefit ratios using net government spending (subtracting nontax revenue) yields different results. Although net government expenditures decreased in FY2016 for the first time in three years, the level of expenditures benefiting business has remained stable.

“While there is variability in the primary state and local taxes paid by businesses, the total business tax contribution to state and local finances has remained significant since FY2003,” said Andrew Phillips, Principal in the Quantitative Economics and Statistics (QUEST) practice of Ernst & Young LLP. “It is interesting that reductions in net government expenditures result in a higher business share of total net state and local government expenditures, not actual increases to business benefit.”

Click here or find a copy of the study at ey.com/us/salt

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This news release has been issued by Ernst & Young LLP, a member firm of EY serving clients in the US.

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