The United States’ top federal statutory corporate income tax rate of 39.1 percent now ranks as the highest in the world, according to a new report released by the Congressional Budget Office (CBO) on March 8. But state taxes play a role in that percentage, too.
The top federal statutory rate had been 35 percent since 1993. But when state taxes are factored in, the rate reached its new global high, the CBO states. So, how do state corporate income taxes compare? The Tax Foundation’s State Corporate Income Tax Rates and Brackets for 2017 report offers some insight.
How big a slice of the pie? Almost all (44) states levy corporate income taxes, ranging from North Carolina’s low of 3 percent to Iowa’s high of 12 percent.
“Though often thought of as a major tax type, corporate income taxes account for just 5.4 percent of state tax collections and 2.7 percent of state general revenue,” the report states.
Besides Iowa’s top rate, marginal corporate income tax rates of 9 percent or more are levied in Alaska, Connecticut, Minnesota, New Jersey, Pennsylvania, and the District of Columbia.
At the lowest level, Arizona, North Dakota, Colorado, Mississippi, South Carolina, and Utah join North Carolina with top rates at or below 5 percent.
Gross receipts taxes. Instead of corporate income taxes, Nevada, Ohio, Texas, and Washington impose gross receipts taxes on businesses.
“Gross receipts taxes are generally thought to be more economically harmful than corporate income taxes,” the report states.
Delaware and Virginia levy gross receipts taxes in addition to corporate income taxes, while South Dakota and Wyoming levy neither.
Single-rate tax systems. The District of Columbia and 27 states use single-rate corporate tax systems likely because “there is no meaningful ‘ability to pay’ concept in corporate taxation,” the report states.
Citing Jeffrey Kwall, professor of law at Loyola University Chicago School of Law, the report notes that “graduated corporate rates are inequitable – that is, the size of a corporation bears no necessary relation to the income levels of the owners. Indeed, low-income corporations may be owned by individuals with high incomes, and high-income corporations may be owned by individuals with low incomes.”
Further, a single-rate system lessens the incentive for “economically wasteful tax planning to mitigate the damage of higher marginal tax rates that some states levy as taxable income rises,” the report states.
Snapshot of corporate tax changes in 2017. Several states enacted corporate income tax rate reductions and other reforms, taking effect in 2016 or 2017. Key changes include:
- North Carolina’s 3 percent rate dropped from 4 percent as part of a comprehensive 2013 tax reform package. In 2013, it was 6.9 percent.
- Arizona cut its corporate rate from 5.5 percent to 4.9 percent.
- New Mexico’s rate dropped from 6.6 percent to 6.2 percent, and will be reduced further to 5.9 percent in 2018.
- The District of Columbia’s rate dropped from 9.2 percent to 9 percent.
- Indiana’s 6.25 percent rate will drop to 6 percent on July 1. By 2021, it will drop to 4.9 percent.