Overview

Like the individual income tax, the corporate income tax is largely derived from the federal corporate income tax. The starting point for the corporate income tax, however is federal taxable income. There are only two rates of corporate income tax, 5.58% and 7.81%. The higher rate is for all corporate income greater than $50,000.

The primary policy issue for Nebraska, and other states, is how the income of a multistate enterprise is allocated to Nebraska. For the last 15 years, Nebraska has apportioned multistate income based only on sales the company makes in the state. Many states continue to consider the amount of property and payroll in the state, a practice that was universal 25 years ago. There are further details on this issue that are covered in "Program History and Description".

Tax Policy and the Corporate Income Tax

Adequacy - The corporate income tax is both unstable and slow growing. From fiscal year 1980-81 to FY2000-01, the corporate income tax grew only 0.42 times as fast as personal income and fluctuated wildly. Recently, the corporate income tax has rebounded and been quite productive. However, this recent trend is unusual both in Nebraska and when examining other states' experience with the tax. Recent rapid growth may be aberrational. This growth pattern is detailed in the analysis entitled "Corporate Income Tax Receipts, the Economy, and State Tax Receipts".

Equity - With regard to the corporate income tax, equity considerations are mixed. The existence of a corporate income tax does help assure similar treatment of businesses regardless of business form. Thus, the tax is important for horizontal equity. However, the corporate income tax itself may not levy the same burden as a similar business organized as a partnership, LLC, etc. Also, there is little relationship between tax liability and any benefits derived by the corporation from the state.

Apportionment rules for multi-state corporations result in different treatment of similar in-state versus out-of-state corporations, and for corporations involved in selling versus manufacturing. The availability of economic development credits also varies from business to business. Many of these differences are intentional, designed to stimulate economic growth and may be desirable. Nevertheless, from an objective standpoint, incentives do not treat similar taxpayers in similar ways. There would be no incentive if they did.

Simplicity - Because calculating the tax uses much of the same information as is presently collected by the Internal Revenue Service, the corporate income tax, like the individual income tax, is relatively easy to administer.

Accountability - Corporate income tax is not paid by the individual so there is little taxpayer accountability for the tax, or need for it.

Economic competitiveness - There is much uncertainty as to the impact state and local taxes have on business relocation. Empirical evidence as to the impact tax levels in general have on business growth is inconclusive, but the most recent studies tend to support the notion that high tax rates have a negative impact on economic growth all else being equal, including state spending. The problem is where the state is not constitutionally permitted to borrow money, it as impossible to tax less and spend just as much over the long term. Nebraska's corporate income tax has nominally high rates, but there are a number of apportionment advantages and tax incentives that lower corporate liabilities. The tax clearly is not neutral, largely because it is not designed to be neutral.

Key Point from the Analysis

The corporate income tax has been a rapidly declining source of revenue for the state. In FY1980-81, the corporate income tax contributed about 7% of total state tax receipts. In FY2001-02, it was less than 4%. This occurred despite tax rate increases in the 1980s and no tax rate cuts in the 1990s. After a sharp decline in receipts for FY2001-02, the rate of growth in corporate income tax was less than the rate of inflation growth since 1980. This decline is shown in a number of different ways in the analysis "Corporate Income Tax Receipts, the Economy, and State Tax Receipts".

This decline in relative importance is due in part to state law changing the apportionment of the tax and granting tax incentives to stimulate economic growth. As much as 50% of the decline may be attributed to tax incentives using one method of analysis. In addition to the greater use of employment and investment incentives, causes of this decline include more aggressive state tax planning by the corporations themselves and a greater use of other forms of business organization, like joint ventures, corporate partners, and LLC's.

This decline is not unique to Nebraska. Commentators have lamented the demise of the corporate income tax nationally in recent years. According to many experts, the contribution of the corporate income tax to state revenues nationally has declined by half in the last 30 years (State Tax Review, July 22, 2002). This was about the same decline in relative importance as experienced in Nebraska

From FY2003-04 through FY2005-06, corporate income tax receipts rebounded to more than 6.8% of state receipts, nearly equal to the share in 1980. This observation broke a long string of declines and may have been an aberration. Results for FY2006-07 show a declining share and may be a resumption of the old trend.