CRS Updates Analysis of State Corporate Income Taxes

Recently, state corporate income taxes have become the subject of renewed interest to both state and federal policymakers. The cause of this elevated interest may be the variation in revenue generated by the tax, the expansion of electronic commerce, and/or federal tax policy that affects state corporate income taxes. Congress has had a role in state corporate income taxes for at least two reasons: (1) interstate commerce regulatory oversight and (2) federal and state corporate income tax interaction. Congress may become more involved in state corporate tax issues because of recent changes in interstate commerce and how states administer corporate taxes.

The state corporate income tax is not a major source of revenue for states, but is still an important contributor to state finances. Over the last decade, state corporate income taxes generated approximately 5% of state tax revenue. However, the revenue generated by the tax -- measured as a percentage of gross domestic product -- has been gradually declining. Several explanations have been offered for this gradual decline including (1) state policy decisions to lower the tax burden on corporations, (2) aggressive tax planning by corporations, (3) broad economic cycles diminishing the base, and (4) federal corporate income tax policy. Most research has identified the first two factors as the primary cause for the recent decline.

Many corporations operate in multiple tax jurisdictions which makes the state corporate income tax a relatively complex tax to administer. The base of the corporate income tax (net income or profits) must be fairly apportioned to all of the states where the firm has established a presence (or nexus). A mosaic of nexus standards has been created through multistate tax compacts, state and federal legal decisions, and congressional actions. At present, states do not use a uniform definition of taxable profits or use a uniform method of apportioning income.

On December 13, 2005, the House Judiciary Commercial and Administrative Law Subcommittee approved H.R. 1956. This legislation addresses nexus issues for state corporate income taxes, and is often identified as "brightline" legislation. H.R. 1956 would establish more uniform standards -- generally higher standards -- for the level of business activity that would trigger nexus and thus corporate income taxability. In the Senate, S. 2721 was introduced on May 4, 2006, and is very similar to H.R. 1956.

Nexus issues are also addressed in what has been identified as "streamlining" legislation. Generally, the streamlining legislation, such as S. 2152 and S. 2153, would allow states to require out-of-state vendors to collect sales and use taxes even if the out-of-state vendor does not have nexus in the taxing state. Participating states would have to simplify sales and use taxes before Congress would confer collection enforcement authority. Interstate commerce has complicated the nexus issue for sales and use tax administration, and how this issue is resolved may have broader implications for state corporate income taxes. This report will be updated as legislative events warrant.

                            Contents

  Table 1. Average State Corporate Income Tax Revenue as Share of

The Mechanics of the State Corporate Income Tax

Generally, the state corporate income tax is levied on the accounting profits of a corporation.⁴ The portion of profit that can be attributed to a state serves as the base for that state's corporate income tax. Profits are allocated to a state based on the amount of economic activity that occurs in that state. Following is a more detailed description of the state corporate income tax structure.

Federal Starting Point. Most states and the District of Columbia incorporate the federal income tax code as currently amended (15 states) or as of a specific date (20 states).⁵ The remaining states typically use a measure of income that closely follows the federal definition of taxable income. Using the federal starting point likely eases the compliance burden for corporations, particularly those that have nexus in several states. Nevertheless, many states still require corporations to "add-back" to income exclusions that are allowed under federal corporate income tax rules.⁶

The Uniform Division of Income for Tax Purposes Act (UDITPA). The Uniform Division of Income for Tax Purposes Act (UDITPA) is a model act drafted and adopted by the Commissioners on Uniform State Laws and the American Bar Association. The act sets standards for separating income into business income, which is apportioned to states, and non-business income, which is allocated entirely to the entity's home state.⁷ Generally, non-business income is defined as passive income on corporate owned assets; income from these assets could include dividends, rents, and royalties. Corporations could avoid paying taxes on non-business income by locating in states without a corporate income tax.⁸ Some states, through the Multistate Tax Compact (MTC), have voluntarily adopted uniform rules and procedures for the allocation and apportionment of income -- as defined under UDITPA -- to ease the compliance burden on multistate businesses.⁹ Many of the states that have not formally adopted UDITPA standards still closely adhere to the UDITPA standards.

The Profit Apportionment Formula. Typically, three factors of economic activity are used in the apportionment formula to measure the economic presence of a firm in a state: the percentage of property, the percentage of sales, and the percentage of payroll. Not all states weigh factors equally; some over-weight sales or use only sales to allocate income (often called single-factor sales apportionment). In theory, the weighting should accurately portray the economic presence of the firm. There is no consensus on the definition of "economic presence," and hence there is variation among state apportionment formulas.

Some analysts have suggested that a formula that double-weights sales is the ideal formula because it gives equal weight to input factors (property and payroll), and an output factor (sales).¹⁰ Others have argued that the business tax should be levied based on the business's use of government services provided by the firm's resident state. For example, a corporate income tax that is levied according to the value of one input only, such as property, could be justified because the value of property is closely related to the level of government services provided to the business by the home state. However, corporations also receive benefits from an out-of-state customer's well functioning legal system and public infrastructure. An apportionment formula that includes just the property factor would not compensate the out-of-state customer's government for the benefit to the corporation of those public services.

The general form of the apportionment formula is reproduced below. The superscript i represents the profits (pi), sales (s), property (p), and labor (l), a state attributes to the i-th firm. The superscript T represents the total value of each factor and profits for the firm in a given tax year. The subscript w represents the weight of each respective factor as defined by state law; the weights sum to one.

For example, states that use an even-weight formula would use 0.33 for each w, meaning each factor contributes equally to the determination of profits attributable to a state. If the state were to "double-weight" sales, that means that the w_s is twice the amount of each of the other two weights. In the case of double-weight sales, w_s=0.50; w_p=0.25; and w_s=0.25.

The Bureau of National Affairs periodically surveys state revenue departments about activities that could create nexus.¹¹ The responses highlight the differential treatment from state to state of business activities deemed to create nexus. For example, according to the report, 14 states reported that an out-of-state corporation that maintained a website on a server in the state had established nexus whereas 24 states reported that the activity would not. Another six states indicated that a website would establish nexus only if the server on which the website resided was owned by the corporation.¹²

Throwback Rule. Because of the state-by-state variation in nexus rules, the first step for corporations before apportioning income is to determine the states where the firm has established nexus. The firm then allocates profits to these states based on each respective state's apportionment formula and nexus rules. The different state apportionment formulas and nexus rules, however, often lead to what is termed "nowhere income."¹³ Nowhere income arises because not all states have the same apportionment formula or nexus rules, and some states do not levy a corporate income tax. However, if the destination state imposes a franchise tax or a business license tax that is based on some measure of business activity, then this does not apply. Thus, some states impose corporate income tax rules that stipulate that all sales to customers in states in which the firm does not have nexus (and are not obligated pay any tax based on economic activity) are "thrown back" to the home state.

For example, a California firm that sells goods to customers in Nevada -- which does not have a corporate income tax, nor any other tax based on business activity -- would include Nevada sales in the numerator of the sales factor component of the California apportionment formula. If Nevada had a corporate income tax with a sales factor in the apportionment formula and the firm had established nexus, California would not require the firm to include the Nevada sales in the California corporate income tax apportionment formula. The throwback rule is applied in 24 states and the District of Columbia; 20 states do not impose a throwback rule, and four states do not impose a corporate income tax (see Table 2).¹⁴

State Apportionment Formulas. Table 2 groups states based on their corporate income tax apportionment formula. "Even weight" implies that the each factor is weighted the same or one-third. The hybrid arrangements allow firms to choose the type of apportionment scheme that minimizes tax burden or instructs the firm to use different types of allocation based on the source of income. The most common apportionment formula is the double-weighted sales scheme. A number of states will be moving to a single-factor sales formula in the near future. By 2008, eight states will use a single-factor sales formula.

         Table 2. State Corporate Income Tax Apportionment

        Table 3. State Corporate Income Tax Rates, 2006

According to CRS calculations based on data from the U.S. Census Bureau, state tax revenue from state corporate income taxes grew (in nominal dollars) in all fiscal years except for 1982, 1983, 1992, 1993, 1999, 2001, and 2002. As a portion of gross domestic product (GDP), however, corporate tax revenue has declined from an annual average of 0.43% of GDP over the FY1972 to FY1982 time frame to 0.32% of GDP over the FY1995 to FY2005 time frame. State corporate income tax revenue has become a significantly smaller part of the economy over the last decade. Table 4 reports state corporate tax revenue and GDP for states that impose a state corporate income tax.¹⁵

Several causes have been suggested for the relative decline in state corporate tax revenues in FY2001 and FY2002.¹⁶ The most direct causes would be legislated changes in the tax rate, the tax base, or the compliance rules. The decline in revenue could be the result of state governments, in the aggregate, attempting to lower the tax burden on corporations. The December 2003 Fiscal Survey of States reported that states, in the aggregate, enacted net tax cuts every year from FY1995 through FY2001.¹⁷ Even though these tax cuts were not separated into types of tax by the Fiscal Survey, it seems likely that state corporate income taxes were included in the tax cuts. Recent research has reached a similar conclusion, noting that "[S]tate tax bases have deteriorated further than the federal base because of a combination of explicit state actions [emphasis added] and tax avoidance/evasion by businesses."¹⁸

A second explanation, alluded to above, is that corporations are more effectively avoiding, or even evading taxes through aggressive tax planning.¹⁹ The Multistate Tax Commission (MTC) concluded in a recent study that ". . . various corporations are increasingly taking advantage of structural weakness and loopholes in the state corporate tax systems."²⁰ Again, the MTC study cannot definitively separate the revenue declines arising from policy changes and avoidance/evasion, but still concludes that tax avoidance and evasion is partly responsible for the decline in state corporate tax revenues.

   Table 4. State Corporate Income Tax Revenue and Gross Domestic

Finally, changes to the federal corporate income tax code, which have reduced the base of most state corporate income tax systems, could explain part of the decline in state corporate income tax revenue. A recent report, however, noted that "nearly two-thirds [of states] refused to go along with President Bush's 2001-2004 'bonus depreciation.'. . . ."²² The next section discusses the interaction between federal and state corporate income taxes in more detail.

Interstate Commerce Regulation and Oversight

The interstate commerce regulation and tax interaction issues have attracted interest for three principal reasons: (1) the complex Internet sales tax debate; (2) the recent federal business tax cuts; and (3) state fiscal issues. The link between the Internet sales tax debate and state corporate income taxes is complicated and centers on the prohibition on states reaching beyond their borders to compel out-of-state vendors to collect sales and use taxes.²³ As a general rule, a state can require a vendor to collect sales and use taxes only if the vendor has "substantial nexus" in the state.²⁴ Typically, the substantial nexus standard is satisfied if the vendor has a physical presence in the state.²⁵ Thus, remote Internet transactions, where the vendor has no physical presence in the customer's home state, do not have the sales and use tax added to the price of the good by the vendor. These types of transactions have grown considerably over the last several years and have contributed to the erosion of the sales and use tax base of most states.²⁶

In an effort to persuade Congress to allow states to compel remote vendors to collect use taxes, a coalition of states has been working together to establish a uniform sales and use tax agreement. The coalition of states identifies this agreement as the "Streamlined Sales and Use Tax Agreement" (SSUTA).²⁷ States that sign onto the sales tax compact would have already implemented uniform definitions and compliance rules, thus easing the administrative burden of remote vendor collection. Two bills in the 109^th Congress would grant states these rights.²⁸ If either of these bills were enacted and the states satisfied the requirements for qualification, remote vendors in the compact states would collect use taxes for shipments to states where the vendor does not have a substantial nexus.

Some vendors are concerned that collecting use taxes for a state in which they do not have nexus, could trigger income or other business tax liability. However, past court decisions and the landmark P.L. 86-272 established physical presence as the standard for sufficient nexus for corporate income taxes for firms selling tangible goods. The law, P.L. 86-272, was passed shortly after the Supreme Court issued a ruling that seemed to offer an ambiguous definition of "sufficient nexus." The Supreme Court language that generated this concern (as cited in the Senate report on S. 2524, the Senate version of what became P.L. 86-272) is reproduced below:

The Internet sales and use tax debate has revived a discussion of what constitutes nexus for a corporate income tax. Clarified nexus standards, however, do not seem destined to fundamentally alter the administration of state corporate income taxes. As noted above, current laws would already shield out-of-state vendors from corporate income tax liability if the business were only soliciting the sale of tangible goods into the state. As for intangibles goods and services, policymakers would likely insert language to ensure that a corporation would not establish nexus by virtue of collecting sales and use taxes.³¹

Tax Interaction

The "Jobs and Growth Tax Relief Reconciliation Act of 2003" (JGTRRA, P.L. 108-27), included several provisions that reduce the federal tax burden on business investment.³² The federal tax changes also affected state taxes because of the interaction between federal taxes and state taxes on corporations. Generally, states use the federal tax code as the base for the state income tax (see the background section titled "federal starting point").³³ Thus, when the federal definition of the tax base changes, so does the state definition of income.³⁴

JGTRRA included two temporary provisions designed to accelerate the depreciation of capital assets purchased by businesses. The first is a temporary increase in the amount of a capital expenditure that a small business can deduct in the year of purchase.³⁵ The larger deduction reduces the base of the federal corporate income tax and thus the state corporate income tax base for those states that link directly to the federal tax code. The change in federal law may generate a significant revenue loss in the short run for those states that remain linked to the federal definition of business income.³⁶ This provision would have expired on December 31, 2005, but was extended through December 31, 2007, by the American Jobs Creation Act of 2004, (P.L. 108-357).

A second JGTRRA provision allowed for "bonus depreciation" for certain capital expenditures. Businesses that buy qualified capital assets before January 1, 2005 could have immediately deducted 50% of the purchase price from gross income. The combined effect of the two original provisions (not including the 2004 extension of the small business deduction described above) would cost states an estimated $2.7 billion. If the provisions were made permanent, the cost to the states has been estimated to rise to $17.7 billion over the 2004-2013 budget window.³⁷

Proponents of the accelerated depreciation provisions, however, would argue that over the long run, increased business investment would likely lead to stronger economic growth and in turn more corporate income tax revenue. The long run net budget outcome of the two countervailing forces is uncertain and relies on debatable assumptions about the response of businesses to investment incentives delivered through the federal tax code.

The JGTRRA provisions adversely affect state budgets in the short run because the tax relief is delivered through changes in the base. If Congress were concerned primarily with the impact of federal corporate income tax law changes on the states, changes in corporate income tax rates would have minimal impact on the states. Unlike changes in the tax base, a federal tax rate change would not directly affect state corporate income taxes.

Legislative Activity

Legislation in the 109^th Congress would have authorized states to compel remote vendors to collect sales and use taxes. Even though the bills address the collection of state sales and use taxes, not state corporate income taxes, some policymakers believe that the issues are similar to those surrounding the state corporate income tax. Related legislation would have established a "physical presence" standard for business activity taxes (BATs, primarily state corporate income taxes). In the 109^th Congress, H.R. 1956, which on December 13, 2005, was approved by the House Judiciary Commercial and Administrative Law Subcommittee, addresses the nexus standards for purposes of levying a state corporate income tax. A very similar companion bill, S. 2721, was introduced in the Senate on May 4, 2006.

S. 2152 and S. 2153. Two almost identical bills, each given the title of the "Sales Tax Fairness and Simplification Act" (STFSA), would authorize states to require out-of-state vendors to collect sales and use taxes. The authority would only be granted once ". . . 10 states comprising at least 20 percent of the total population of States imposing a sales tax . . . have petitioned for membership under the [Streamlined Sales and Use Tax] Agreement. . . ."³⁸ Under S. 2152, businesses with less the $5 million in sales would be exempt from the collection requirement.³⁹ In contrast, under S. 2153, the Administrator of the Small Business Administration would establish the small business exemption with input from stakeholders. Under both S. 2152 and S. 2153, businesses that collect the tax would receive "reasonable compensation" from the states for expenses incurred for "administration, collection and remittance of sales and use taxes."⁴⁰

The connection to states through the sales and use tax administration has raised concern that implementing the STFSA could pave the way for states to claim that out-of-state vendors have established nexus. Section 7 of the legislation, however, outlines the limitations of the proposed SSUTA. The legislation explicitly states that "No obligation imposed by virtue of the authority granted by section 4 shall be considered in determining whether a seller has a nexus with any State for any tax purpose."⁴¹

H.R. 1956 and S. 2721. Under current law, sales of "tangible personal property" into a state are not sufficient to trigger tax liability. H.R. 1956 would expand the protection beyond tangible personal property to include services.⁴² This expansion would have had a significant effect on the 32 states where ". . . an employee's solicitation of services while in the state for six or fewer days would create nexus."⁴³

In addition to the expansion of protected interactions, this legislation would have also defined "physical presence" as the standard for collecting business activity taxes. Under this proposal, physical presence would be established and a business activity tax allowable if:

• the individual or business is physically within the state for 21 days (not including trips to buy goods or services for the business; gathering news for print or other media; meeting with government officials for purposes other than selling goods and services; attending training or educational purposes; or participating in charitable events);

• the individual or business uses the services of another individual or business for 21 days and the hired individual or business does not do business for any other entity; or

• the individual or business leases or owns tangible personal property or real property in the state for more than 21 days.

Analysis. The streamlined sales tax legislation, S. 2152 and S. 2153, would require states to simplify their sales and use tax systems before granting them the authority to compel remote vendors to collect the sales and use tax. From an economic perspective, reduced complexity and compliance costs for businesses, not just those engaged in interstate commerce, would likely increase the efficiency of the tax system. To the extent that the changes imposed by the legislation would treat all transactions neutrally, they would also increase the equity of the tax system.

The critical concern is how stringent the SSUTA enforcement will be if implemented. If the agreement is not strictly enforced, then any gains in economic efficiency are lost and the anticipated improved equity diminished. The de minimus standards could be administratively difficult to enforce and could create loopholes through which businesses could circumvent the intent of the SSUTA. These standards could be eliminated if the SSUTA were strictly enforced and the rules on what was taxable were truly uniform from state to state. The ease of compliance with a truly uniform base would render seemingly arbitrary minimum sales thresholds unnecessary.⁴⁴ Even though the statutory burden of the sales and use tax falls on consumers, the SSUTA legislation may be considered in conjunction with other legislation that more directly addresses how states tax businesses.

The BAT legislation in the 109^th Congress, H.R. 1956 and S. 2721, is intended to further modify the state taxation of businesses engaged in interstate commerce. The legislation would impose new regulations on how states impose taxes on multi-state businesses, through (1) imposing uniformity on the time component of nexus determination and (2) expanding the definition of goods and services subject to the nexus rules. The legislation would not directly address the complexity of the state corporate income tax structure -- in particular, the various apportionment formulas (and allocation rules) described earlier.

Many economists and other researchers who analyze state corporate income taxes agree that the critical issue with the current state corporate income tax structure is the variability in the allocation and apportionment of corporate income from state to state. The current mosaic of state corporate income tax rules creates economic inefficiencies for the following reasons: (1) relatively high compliance costs, (2) increased opportunities for tax planning by businesses, and (3) potential gaps and overlaps in taxation. The new regulations as proposed in H.R. 1956 and S. 2721, would exacerbate the underlying inefficiencies because the threshold for business -- the 21-day rule, higher than currently exists in most states -- would increase opportunities for tax planning leading to more "nowhere income." In addition, expanding the number of transactions that are covered by P.L. 86-272 would have expanded the opportunities for tax planning and thus tax avoidance and possibly evasion.

² Data are CRS calculations based on U.S. Census of Governments data. These data is available at the following website [http://www.census.gov/govs/www/statetax05.html]. Robert Cline, Tom Neubig, and Andrew Phillips, "Total State and Local Business Taxes: Nationally 1980-2005 and by State 2002-2005," State Tax Notes, May 1, 2006, estimated that businesses paid approximately 44% of total state and local taxes. They also estimated that businesses paid over half of total general sales tax revenue.

³ CRS calculations based on U.S. Census of Governments data; see above for website link.

⁴ Net income is revenue less expenses, which is roughly equivalent to pre-tax accounting profits.

⁵ These 35 states directly incorporate the federal tax code, however, all states except for Arkansas and Mississippi (and D.C.), use federal income for the starting point for purposes of calculating income tax liability.

⁶ Bureau of National Affairs, "Multistate Tax Report: 2003 Survey of State Tax Departments," vol. 10, no. 4, Apr. 25, 2003. The report identifies the add-backs and other special corporate income tax rules for each state.

⁷ For more on UDITPA, see John S. Warren, "UDITPA -- A Historical Perspective," State Tax Notes, Oct. 3, 2005, pp. 133-136.

⁸ A "throwback" or unitary accounting rules would limit this type of tax planning to avoid taxation of non-business income.

⁹ According to the Commerce Clearing House (CCH) publication, State Corporate Income Tax Guide, seven states have enacted UDITPA as written and 12 more states have adopted UDITPA with some minor modifications.

¹⁰ James Francis and Brian H. McGavin, "Market Versus Production States: An Economic Analysis of Apportionment Principles," in State Taxation of Business: Issues and Policy Options, Thomas Pogue, ed. (New York: Praeger Publishers, 1992), p. 61.

¹¹ Bureau of National Affairs, Multistate Tax Report: 2006 Survey of State Tax Departments, vol. 13, no. 4, Apr. 28, 2006.

¹² Alabama and Pennsylvania did not respond to the BNA survey and four states, Nevada, South Dakota, Washington, and Wyoming, do not levy a tax on corporate income.

¹³ The converse is also true. Income could also be overtaxed because of the variety of apportionment formulas employed by states.

¹⁴ Bureau of National Affairs, Multistate Tax Report: 2006 Survey of State Tax Departments, vol. 13, no. 4, Apr. 28, 2006. Recall that Alabama and Pennsylvania did not respond.

¹⁵ The governments division of the Census Bureau collects and reports state tax collections by type of tax based on survey information from the states.

¹⁶ William F. Fox and LeAnn Luna, "State Corporate Tax Revenue Trends: Causes and Possible Solutions," National Tax Journal, vol. LV, no. 3, Sept. 2002, pp. 491-508. (Hereafter cited as Fox and Luna, State Corporate Tax Revenue Trends.)

¹⁷ National Association of State Budget Officers, December 2003 Fiscal Survey of States.

¹⁸ Fox and Luna, State Corporate Tax Revenue Trends, p. 498.

¹⁹ Tax avoidance is a legal means of reducing tax liability, such as buying tax-exempt bonds. In contrast, tax evasion is illegal, such as not claiming otherwise taxable income.

²⁰ Multistate Tax Commission, "Corporate Tax Sheltering and the Impact on State Corporate Income Tax Revenue Collections," July 15, 2003, from the Executive Summary.

²¹ Brian Knight, Andrea Kusko, and Laura Rubin, "Problems and Prospects for State and Local Governments," paper presented at Urban Institute Seminar, State Fiscal Crises: Causes, Consequences, and Solutions, Apr. 5, 2003.

²² McIntyre, Robert S and T.D. Coo Nguyen, "State Corporate Income Taxes 2001-2003," State Tax Notes, March 7, 2005, pp. 685-712.

²³ A sales tax is levied at the time of transaction and is tax on the sale. The companion use tax is a tax on the use of a good or service. Technically, remote vendors would collect a use tax because the product is going to be used in the customer's home state.

²⁴ The limitation arises from the due process and commerce clauses in the U.S. Constitution.

²⁵ For more on the sales tax issue, see CRS Report RL31252, Internet Commerce and State Sales and Use Taxes, by Steve Maguire.

²⁶ Donald Bruce and William F. Fox, "State and Local Sales Tax Revenue Losses from E-Commerce: Estimates as of July 2004," Center for Business and Economic Research, University of Tennessee, July 2004. Bruce and Fox estimated this erosion from electronic commerce alone will result in states losing between $21.5 billion and $33.7 billion in 2008. There is considerable debate, however, about the size of the revenue loss.

²⁷ For more on the SSUTA, see CRS Report RS22387, The Streamlined Sales and Use Tax Agreement: A Brief Description, by Steven Maguire.

²⁸ S. 2152 and S. 2153.

²⁹ U.S. Congress, Senate Committee on Finance, State Income Taxes -- Interstate Commerce, Senate report to accompany S. 2524, S.Rept. 658, 86^th Cong., 1^st sess. (Washington: GPO, Aug. 11, 1959) p. 2549.

³⁰ Ibid.

³¹ Section 7(a) of S. 1736 from the 108^th Congress states that "[N]othing in this Act shall be construed as subjecting sellers to franchise taxes, income taxes, or licensing requirements of a state or political subdivision thereof, nor shall anything in this Act be construed as affecting the application of such taxes or requirements or enlarging or reducing the authority of any State to impose such taxes or requirements."

³² For more on the business tax cuts in P.L. 108-27, see CRS Report RL32034, The Jobs and Growth Tax Relief Reconciliation Act of 2003 and Business Investment, by Gary Guenther.

³³ Many states, as noted earlier, have decided not to incorporate recent federal changes. For more, see McIntyre, Robert S and T.D. Coo Nguyen, "State Corporate Income Taxes 2001-2003," State Tax Notes, Mar. 7, 2005, pp. 685-712.

³⁴ Another issue is fiscal policy coordination between the federal, state, and local governments. If state governments do not adopt the federal tax changes, then the fiscal stimulus of federal tax policy is muted by state non-compliance. For more on the countervailing fiscal stimulus effects, see CRS Report RL31936, General Revenue Sharing: Background and Analysis, by Steven Maguire.

³⁵ 26 U.S.C. § 179.

³⁶ According to a recent analysis by the Center on Budget and Policy Priorities, ". . . 17 states stand to lose an estimated $1.1 billion in 2004 and another $600 million by the end of 2005." Nicholas Johnson, "Federal Tax Changes Likely to Cost States Billions of Dollars in Coming Years," Center on Budget and Policy Priorities, June 5, 2003, p. 5.

³⁷ Nicholas Johnson, "Federal Tax Changes Likely to Cost States Billions of Dollars in Coming Years," Center on Budget and Policy Priorities, June 5, 2003, Tables 2 and 3.

³⁸ Section 4(a).

³⁹ Section 4(d).

⁴⁰ Section 6(a).

⁴¹ Section 7(b).

⁴² Generally, H.R. 1956 strikes the "tangible personal property" identifier and inserts "or transaction." This change would presumably expand the "protected" activity to include service transactions.

⁴³ BNA, Apr. 25, 2003.

⁴⁴ Charles McClure and Walter Hellerstein, "Congressional Intervention in State Taxation: A Normative Analysis of Three Proposals," State Tax Notes, Mar. 1, 2004, p. 732.