Dive Brief:

• Several states began the new year with cuts to corporate income tax as businesses and employees move to lower-tax jurisdictions, prolonging the pandemic-induced shift to remote work, according to the Tax Foundation.
• At the start of 2023, Iowa and Arkansas reduced top corporate tax levies to 8.4% from 9.8%, and to 5.3% from 5.9%, respectively, the Tax Foundation said. New Hampshire, Pennsylvania and Idaho also trimmed corporate taxes.
• “The ongoing shift toward flexible and remote work has freed up both businesses and employees to be much more mobile than they ever were before,” Tax Foundation Policy Analyst Janelle Fritts said. State officials know that “if a tax code gets in the way of success, individuals and businesses can pack up and move to states where they have better opportunities.”

Dive Insight:

Reliance of U.S. state governments on corporate income tax rose to 4% of general revenue in fiscal year 2021 from 2.3% in fiscal year 2020, the Tax Foundation said in a report.

State tax revenue expanded along with a surge in business profits. Corporate net income increased during the pandemic as robust demand for goods collided with disruptions to supply chains, pushing up prices, Fritts said in an email response to questions.

The trend persisted in fiscal year 2022, with state corporate income tax revenue increasing 34.7% during the 12-month period ending June 30, 2022, according to the Tax Policy Center.

“Exceptionally strong corporate income tax revenue growth throughout fiscal year 2022 stands in sharp contrast to the stagnant growth patterns observed after the Great Recession and before the global pandemic,” the Tax Policy Center said in a report.

“This is partially due to some states introducing an elective pass-through entity tax and including payments with state corporate income taxes,” the Tax Policy Center said. Also, companies may have increased estimated payments in anticipation of tax increases by the Biden administration.

The rapid growth in state revenues “must be viewed with caution,” the Tax Policy Center said. In recent years stock market gains, a record number of initial public offerings, high spending on taxable goods and unusually high inflation have fueled tax collections.

At the same time, officials in high-tax states know they need to compete with their low-tax counterparts to retain and attract businesses and employees, Fritts said.

“States are rightly trying to stay competitive by improving their tax codes,” she said, noting that 24 states cut either their corporate or individual income tax rates in 2021 and 2022. “Tax competition and reform will likely stay at the forefront of both legislators’ and business’s minds in coming years.”