Do Limited Liability Companies Explain Declining State Corporate Tax Revenues?

Abstract

The effective state corporate tax rate fell significantly during the past fifteen years despite the very robust growth in corporate book profits. This article examines the causes of the decline with a focus on the effects of the relatively new option of forming limited liability companies (LLCs), state tax policy, and changes in the federal base. The effects are estimated using a simultaneous equation model and a twelve-year panel for U.S. states. The results confirm that the advent and growth of LLCs have been important causes of the decline in corporate tax revenues. In addition, changes in the federal corporate tax base, the propensity of states to grant tax incentives, and the failure of states to require combined reporting have been significant factors in falling corporate tax revenues.