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The corporate load: Arkansas' corporate tax load is about average when compared with other states.

The state Department of Finance and Administration's Office of Economic Analysis and Tax Research recently issued a revenue summary.

Under the category dealing with corporate income tax collections was this: "Corporate income tax revenues |net of refunds~ are now declining at an annual rate of 9.5 percent or a total of $113.2 million."

It's a volatile subject. Revenues collected from taxes on corporations can increase or decline suddenly.

Profits are subjected to the rise and fall of revenues and the rise and fall of costs. Combine that with inflation, and you have a revenue sector that is difficult to forecast.

That, says Joe LaFace, is why states generally rely on corporate income taxes for only small percentages of their tax bases.

LaFace is a research administrator for DF&A. In his office near the Capitol are volumes filled with tax law, tax records and statistics on individual and corporate taxes.

LaFace refers to his office as a library. Subjective analysis gives way to numbers, numbers and more numbers.

And the recent numbers on corporate income tax revenues are worth a look.

"We worry about it," LaFace says. "It is difficult to predict corporate profits. There is a lot of volatility. This is typical of most states.

"Corporate profits as a percentage of state revenues are 3-6 percent in virtually every state. It's generally not a big component."

Arkansas' corporate tax load is, however, a frequent subject of debate.

Critics say tax exemptions for large industries have led to a regressive tax structure. Corporate officials and pro-incentive legislators counter that the tax breaks are necessary to keep industries in the state.

Often, they claim, the numbers are twisted to make corporations appear as the bad guys. One industry official points to a statement often made by critics of state tax policies: State income tax collections from individuals increased twice as quickly as collections from corporations from 1985 to 1987.

Is that true?

Probably, he says.

What does it mean?

Simply that personal income and personal spending went up twice as fast as corporate spending during those two years, he claims.

A Fair Share

Do Arkansas corporations contribute their fair share?

Compared with other states, the Arkansas corporate tax load is about average.

According to 1987 tax revenue figures from DF&A -- the latest year for which a complete analysis is available -- 28.3 percent of state revenue came from the personal income tax. About 6.1 percent came from the corporate income tax.

While that might not appear fair at first glance, proponents of the current corporate tax structure say a look at the bigger picture is in order.

In 1987, Arkansas had the country's 29th-highest personal income tax burden. Arkansas businesses had the 21st-highest tax burden.

By 1990, Arkansas ranked 26th for personal income tax and 25th for corporate income tax loads.

Five states have no corporate income taxes. They are Michigan, Nevada, Texas, Washington and Wyoming.

"Revenue tends to increase faster in states that rely heavily on the personal income tax because that tax has a relatively high elasticity," DF&A researchers wrote in a review of state revenues. "On the other hand, states that do not impose an income tax or have a low one tend to have slower growing revenues."

Large paper companies have received much of the criticism in recent years for taking advantage of tax incentives. Act 529 of 1985, which provides incentives for existing manufacturing firms, is frequently cited by critics of the corporate tax structure.

International Paper officials say they kept operations in Arkansas because of the bill. The company had earned Act 529 tax credits totaling $35.2 million through 1991. IP officials point out that the $35.2 million represents 7 percent of IP's investment, meaning the company has invested $502.9 million in Arkansas.
Corporate Income Tax As Percent Of State Tax Collections 1990
Rank State Percent
1 New Hampshire 21.3
2 Michigan 16.0
3 Connecticut 12.9
4 Alaska 12.0
5 California 11.4
6 New Jersey 10.8
7 Delaware 10.4
8 West Virginia 9.9
9 Louisiana 9.6
10 Montana 9.4
11 Massachusetts 9.3
12 Pennsylvania 8.3
13 Kansas 7.9
14 Tennessee 7.8
15 North Carolina 7.8
16 Illinois 7.3
17 Minnesota 7.1
18 North Dakota 6.9
19 Georgia 6.8
20 Wisconsin 6.7
25 Arkansas 5.8

Two years ago, IP researchers compared tax burdens on a typical 1,000-ton-per-day kraft mill in 20 states. IP or competitors own facilities in those states. The IP comparisons showed Arkansas' tax burden to be the third highest behind Florida and Georgia.

Apples And Oranges

The Arkansas Institute for Economic Advancement at the University of Arkansas at Little Rock produces statistical breakdowns comparing Arkansas taxes with those in neighboring states.

Neva Wayman, who researched various tax packages, admits that trying to compare state tax structures can be an apples-and-oranges proposition.

Arkansas joins Alabama, Louisiana, Mississippi, Missouri, Oklahoma and Tennessee in levying corporate income taxes. But Oklahoma allows a 1 percent credit on corporate income taxes for manufacturing and processing when certain investment levels are met.
Individual Income Tax As Percent Of State Tax Collections 1990
Rank State Percent
1 Oregon 65.6
2 New York 53.4
3 Massachusetts 52.4
4 Virginia 46.7
5 Maryland 44.4
6 Colorado 43.7
7 North Carolina 43.1
8 Minnesota 42.2
9 Georgia 40.5
10 Delaware 40.4
11 Wisconsin 40.4
12 California 38.7
13 Iowa 38.4
14 Vermont 37.7
15 Maine 37.2
16 Utah 36.6
17 Missouri 36.3
18 Ohio 36.1
19 Idaho 35.4
20 South Carolina 35.1
26 Arkansas 32.7

Arkansas, Mississippi and Oklahoma differ from Alabama, Louisiana, Missouri and Tennessee when it comes to corporate federal income tax deductions. All differ from Texas, which has no income taxes.

"It is difficult to compare," Wayman says.

She even found it difficult to communicate with employees of other states.

"When I would read them some of the questions that apply to Arkansas, they would say, 'What? That doesn't exactly apply to us,'" she says.

LaFace says the U.S. Advisory Commission on Intergovernmental Relations provides the most comprehensive look at state taxes. ACIR rankings for corporate net income and net worth taxes ranked Arkansas 35th for "tax effort."

What does that mean?

It depends on who is interpreting the numbers.

"You can't answer the question, 'Who has the worst burden?'" LaFace says. "No one really knows."
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No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Webb, Kane
Publication:Arkansas Business
Date:Apr 6, 1992
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