Liberals often express consternation—justifiably—when politicians complain about roughly half of Americans “paying no taxes.” The real statistic is that about half of Americans pay no federal individual income tax. But most of those “non-payers” actually pay other taxes—payroll tax, excise taxes, and various state and local taxes. And because federal individual income tax is the most progressive major component of our tax system, looking at it alone understates the share of the tax burden borne by people with low and moderate incomes.
But while liberals seem to understand that the “half of Americans pay no taxes” stat is phony, they seem all too comfortable complaining about corporations that “don’t pay taxes.” Yet this claim is vulnerable to exactly the same response—many businesses that seem to be getting a sweet deal on income tax get hit disproportionately hard with other taxes.
In fiscal year 2010, businesses paid about $280 billion in federal corporate income taxes. But over that same period, they paid $619 billion in taxes to state and local governments. The largest components of that tax bill were property tax ($250 billion) and sales tax on purchases by businesses ($124 billion).
While businesses often benefit from unwarranted tax breaks at the federal level, the deck is stacked against them on some major state and local taxes. For example, total property tax collections in the United States were $425 billion in fiscal 2010. That means businesses paid 59 percent of all property taxes, even though they only own about 40 percent of the country’s taxable real property.* This happens because most jurisdictions tax business property at an unfavorable rate compared to owner-occupied housing.
Businesses shouldn’t have to pay sales tax at all. Sales tax is supposed to be a tax on consumption—but when you tax intermediate business purchases, that tax becomes a component of the cost of a final sale good or service which may be taxed again. The structure of state sales taxes, which often exempt many consumer services while taxing intermediate purchases of goods, inappropriately shifts the tax burden toward certain business activities.
Of course, though a business remits taxes, it never really “pays” them: business tax burdens fall in some proportion on owners, workers, and customers. But that is equally true of the federal corporate income tax and the state and local taxes that businesses pay. A corporation with a surprisingly light federal tax bill may well be paying more than its “fair share” of state and local taxes. As with individuals, you should look at the full picture before you decide who is taxed too much or too little.
*This is a calculation from the Federal Reserve Flow of Funds report, looking at real property assets held by individuals, corporate businesses, and non-corporate businesses. Other real property is owned by non-profit organizations and governments, but such property is generally not subject to tax.