The Utah Corporate Franchise Tax:
A Review in Time and Place
Three decades of relative decline, but...
Utah initiated the corporate franchise tax in 1931 with a rate of 3 percent. Since then, occasional changes have taken place both in rates and base. The rate has been as high as 6 percent, from 1965 to 1977, but has been at the current 5 percent rate since 1984.
Over the last 40 fiscal years rates have increased and decreased and the base has been both contracted and expanded, but for the whole period and for almost every five-year interval, except the mid-1990s, the tax has declined in relative importance, as a share of major revenues. (The data in this section cover more data than the detailed tables, which do not include some minor sources in the accounting totals. The main difference is S Corporation payments for non-residents.)
The table and chart 1.1 on the following page reveal how corporate taxes have evolved relative to both the sales and personal income taxes, the other major taxes. On the figure, the three lines proceeding from the lower left to the upper right show the amount of sales, income, and corporate taxes collected. The amount of each tax is shown on the left scale. By fiscal 2001, income tax collections were 105 times as high as in 1960 and sales taxes were 50 times as high. By contrast, corporate tax collections were less than 28 times as high.
The line starting in the upper left and falling to the lower right shows corporate collections as a share of the three major taxes listed on the table. Although the share of corporate taxes fell for almost the entire period, the steepest five-year fall was from 1965 to 1970. Even though the rate was raised to 6 percent in 1965, the period of the Vietnam related inflation from 1965 to 1975 was when the other taxes outpaced the corporate tax the most. The plot also makes obvious the declining relative share of corporate taxes in every five-year period, except from 1975 to 1980. In 1995 to 1998, the corporate share was slightly over the 1990 fraction, but has fallen again recently.
The final column in the table shows the ratio of corporate taxes to individual income taxes. In 1960, the ratio was more than 38 percent, but in 1998 it was near 10 percent.
The reasons behind the fall in the corporate tax share are many and complex; a thorough explanation is well beyond both the scope of this paper. All three taxes have had major changes to both the rate and the base over 30 years. And the changing nature of the economy also is part of the story. The following will give only a glimpse of the complete explanation.
From 1960 to 2001, the state sales tax rate increased from only 2 percent to 4.875 percent, an increase of 144 percent.
In the meantime, the top individual income tax rate was increased from 5 to 7 percent, an increase of 44 percent. In the same period the corporate tax rate was increased from 4 to 5 percent, a 25 percent increase.
The personal income tax has been particularly elastic, growing more than income, because the tax brackets have not been changed since 1973. They were increased beginning in 2001, but that revenue decrease will be realized after the coverage of this report.
Is Utah a low corporate tax state?
There are at least two senses in which the above question can be viewed: from the view of the individual corporation paying taxes, and from the view of the importance of the tax in total tax collections. A state with a very high (prohibitive) tax rate may have so few corporations that revenue is low. That would be a high-tax state from the view of corporations but a low-tax state from the view of total collections.
Comparing state corporate tax systems has many difficulties since there are so many provisions that may be very complex. Nonetheless, table 1.2 compares the Western States (click) for several major provisions. Column 1 shows that the statutory corporate tax rate ranges from a high of 8.84 percent in California to a low of 4.63 percent in Colorado. The simple average for the western states is 6.8 percent. On the basis of rate, Utah is a low corporate income tax state.
The third column reports the minimum tax status of each state. The minimum tax reported here is not a parallel to the federal minimum tax, which depends on tax preference items used to reduce normal taxes, but is a minimum that must be paid irrespective of other items reported. The minimum tax required ranges from a low of zero in Colorado and New Mexico to a high of $800 in California. (California also has an alternative minimum tax based on the federal alternative minimum.) With a minimum tax of $100, Utah has one of the higher minimum taxes. And 65 to 70 percent of all corporations pay the minimum tax. Although the Utah minimum tax is higher than in the surrounding states, since it is so low and most for-profit groups do not plan on only paying the minimum tax, it is hard to think of it as a competitive factor for corporations. Any argument to reduce it would have to center more on the inherent justice of the tax rather than on competitive factors.
The corporate tax is based on the results the corporation achieves in an arbitrary period, the year. As a result, if no provisions were made for considering neighboring years in determining taxes, corporations would have incentives to arrange incomes and costs to push incomes into loss years and costs into profit years. For example, a firm experiencing current losses and expecting profits next year may be tempted to delay making payments near the end of the year into the next year. This could cost expensive resources and distort the true picture of a corporation's performance. As a result, the federal government has fairly lenient provisions letting corporations reduce both past and future taxes to offset one (or several) year's losses. Since states do not have the ability to run deficits the way the federal government does, many states have limited this provision, particularly in the backward direction. For the states the problem is more acute in the backward direction, since a large loss carryback may require the refunding of three years' taxes all in one year, whereas a carryforward would spread the cost of a current loss to the state over several future years. In column 4, the operating loss provisions of the Western States are reported in a "back" and "forward" column. For all practical purposes, only Utah, which limits loss-carrybacks to $1,000,000 ($50,000 in taxes) since 1994, and Montana allow the three-year carryback, since Idaho limits the loss- carryback to only $100,000 ($8,000 in taxes). Most states allow a fifteen year carryforward, which is what Utah allows.
Column 2, tax share, reports the ratio of corporate taxes to all taxes collected, as reported to the Census Bureau. We have used 1999 data since that is the most recent available for all states. Reliance on corporation taxes in the Western States ranges from a high of nearly 7.5 percent in California to a low of 4.4 percent in Idaho. Utah is near the bottom at 4.9 percent. The simple average is 5.8 percent These shares, however, are sensitive to the economy for the year in question, since corporate taxes can be very erratic.
From the perspective of the corporation, Utah seems to be a low corporate tax state, with a low rate and the most generous carry-over provisions, at least according to this limited survey. It also seems below average in the importance of the tax to the state.