A new EPI report finds that the effective state and local tax rate on corporate profits shrunk by between a third and a half between 1989 and 2017, resulting in a revenue shortfall between $43 billion and $57 billion.

Further, more than 60% of corporations pay no state corporate income tax in seven states—Connecticut, Colorado, Florida, Illinois, Michigan, Tennessee, and Wisconsin. And depending on the state, between 11% and 27% of corporations with over $1 billion in federal taxable income pay nothing or next to nothing in state corporate income taxes, according to the report.

This revenue shortfall has had real consequences for governments’ ability to provide basic services to their residents because state and local governments typically must match spending with revenue each year. To give a sense of the significance of revenue losses, state and local governments could essentially fully fund universal high-quality pre-kindergarten for all 3- and 4-year-olds with $57 billion.

The decline in tax revenue can be traced to a combination of state corporate income tax cuts, a rise in the share of corporate profits earned by S-corporations—which are exempt from most state corporate income taxes—and the ability of large, profitable corporations to exploit loopholes that allow them to minimize their tax bills.

Notably, the erosion of state corporate income tax revenue has nothing to do with corporations’ ability to pay. Corporate profits have risen even as corporate tax revenues have declined.

“Tax revenues are critical to the ability of state and local governments to provide basic services to their residents, including K–12 education, child care and elder care, maintenance of roads and bridges, and public health and safety, among others,” said Josh Bivens, director of research at EPI and author of the report. “However, in recent decades state and local policymakers have consistently allowed corporations to reduce their share of taxes. These policy decisions should be reversed to ensure profitable businesses pay their fair share in taxes.”

The report floats a number of reforms state legislators could implement to help stem these losses, including: 

• Raising statutory corporate income tax rates.
• Passing legislation that forces corporations to provide a state-by-state accounting of their profits and taxes.
• Taking steps to ensure corporations can’t simply evade taxes by setting themselves up as S-corporations or other new forms of businesses. Legislators can either tax these new business forms or raise personal income taxes progressively.