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Big Corporations Are Getting Off Easy With State Income Taxes, Too

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America’s corporate tax rate, at 35%, is too high: That’s the refrain that Republican presidential hopefuls from Mitt Romney, Newt Gingrich, Rick Perry to Ron Paul have consistently repeated as they campaign for the GOP nomination.
But, as detailed by the New York Times, though the nominal federal corporate tax rate is indeed high (second highest in the world, in fact), but by taking advantage of the various loopholes and available tax incentives, few -- if any -- big business in America actually pay the 35% tax rate. Honeywell International (HON), for example, paid income taxes worth about 15% of its profits.
And now, a new study conducted by the Institution on Taxation and Economic Policy and Citizens for Tax Justice, two Washington non-partisan think tanks, revealed that even at the state level, big corporations have been able to avoid high tax rates.
According to Stateline, the study, helpfully titled “Corporate Tax Dodging in the Fifty States, 2008-2010,” looked at financial reports from 265 of the 280 profitable Fortune 500 companies, such as DuPont (DFT), Intel (INTC), Goodrich (GR) and International Paper (IP), and found that these firms paid on average just about 3% of their domestic profits in state taxes -- which is more than 50% less than the national state corporate income tax rate of 6.2 percent, costing states some $83 billion in lost tax revenue.  
The study found three central reasons for the steady decline in state corporate income tax revenues: the tendency for states to link their corporate tax rates to those at the federal level; the frequency of state-granted corporate tax incentives; and the common practice of profit shifting that allows companies to cut down their state tax liabilities.
“Piggybacking” on the federal tax code — by using the same definition of “taxable income” that the federal government employs, for instance — allows states to simplify their own process of collecting taxes. The tradeoff, according to ITEP and CTJ, is that “every new corporate loophole that gets tucked into the federal code will also erode the state tax base.”

“Even if these federal tax breaks, many of which are ostensibly designed to encourage business investment, are having an effect nationally,” the study says, “it makes little sense for any state to piggyback on a tax cut that could encourage investment anyhere in the United States.”

Beyond federal credits that automatically find their way into state tax codes, states have approved a plethora of their own corporate tax breaks. These can help individual companies — Sears, for example, has been angling for a tax-break package in Illinois — or whole industries. Some states have gone further: Michigan this year approved a wholesale revision of its corporate income tax, reducing the liability for companies around the state.
And as for profit shifting, what corporations have done is shift to transfer their profits on paper from the state in which it was earned to one which has lower tax rate or does not even collect taxes at all.
While the question of whether high or low corporate tax rates continues to be hotly contested by liberal and conservative economists, it seems that at least one thing is certain: Life is good if you’re a big business.
POSITION:  No positions in stocks mentioned.