Corporate profits

State corporation tax increases tax burden on corporate profits

Corporations in the United States pay federal corporate income taxes at a rate of 21 percent. Many states also levy corporate income taxes. Forty-four states and DC have corporate taxes on the books, with top rates ranging from North Carolina’s single rate of 2.5% to a top marginal rate of 11.5% in New Jersey. Fourteen states levy graduated corporate tax rates, while the other 30 states levy a flat rate on corporate income.

In Nevada, Ohio, Texas, and Washington, corporations are subject to gross revenue taxes instead of corporate income tax. Delaware and Oregon impose a corporate income tax and a separate gross revenue levy.

The state with the highest combined corporate income tax rate is New Jersey, with a combined rate of 30.1%. Companies in Alaska, California, Illinois, Iowa, Maine, Minnesota, and Pennsylvania face combined corporate income tax rates of 28% or greater . Six states (Ohio, Nevada, South Dakota, Texas, Washington, and Wyoming) are not subject to corporate tax and pay only the 21% federal tax rate.

Corporations can deduct state corporation tax paid from federal taxable income, which reduces the effective federal corporate tax rate. For example, a Michigan corporation can deduct tax paid at a flat rate of 6% from federal corporate income tax of 21%, which reduces its maximum effective federal rate to 19.74% and gives a combined rate of 25.74%.

In addition, three states allow corporations to deduct federal corporation tax from a portion of the state’s corporation tax. Alabama and Louisiana allow full federal corporate income tax deductibility against state liability, while Missouri allows 50% federal corporate income tax deduction . This reduces the effective corporate tax rate faced by corporations in those states. Iowa previously allowed a 50% deduction from federal corporate income tax, but repealed that provision while lowering its corporate tax rate from 12% to 9.8% in 2021.

As policymakers at the federal level debate proposals to increase the corporate tax rate, it is important to consider state corporate taxes and combined corporate tax rates when assessing the impact of the tax system on corporate profits, economic production and workers’ wages.

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