Companies in the United States pay federal corporate income taxes, which are levied at a rate of 21 percent. Many states also levy taxes on corporate income. Forty-four states and DC have corporate taxes on their books, with North Carolina’s top tax rates ranging from 2.5 percent to a top marginal rate of 11.5 percent in New Jersey. Fourteen states have graduated corporate tax rates, while the remaining 30 states have a flat corporate tax rate.
In Nevada, Ohio, Texas, and Washington, companies are subject to gross income taxes instead of corporate taxes. Delaware and Oregon have a corporate income tax and a separate gross income tax.
The state with the highest combined corporate tax rate is New Jersey, with a combined tax rate of 30.1 percent. Companies in Alaska, California, Illinois, Iowa, Maine, Minnesota, and Pennsylvania can expect combined corporate tax rates of at least 28 percent. Six states – Ohio, Nevada, South Dakota, Texas, Washington, and Wyoming – are not subject to state corporation tax and only pay the federal tax rate of 21 percent.
Corporations can deduct state corporate income tax from federal taxable income, lowering the effective federal corporate tax rate. For example, a Michigan company can deduct the 6 percent lump sum tax from federal corporate income tax of 21 percent, lowering the top federal effective tax rate to 19.74 percent and producing a combined tax rate of 25.74 percent.
Additionally, three states allow corporations to deduct federal corporation tax from a portion of state corporation tax. Alabama and Louisiana allow full federal corporate tax deductibility from state liability, while Missouri allows 50 percent federal corporate tax deduction. This lowers the effective corporate tax rate that companies face in these states. Iowa previously allowed a 50 percent federal corporate income tax deduction, but removed that requirement and lowered the corporate tax rate from 12 percent to 9.8 percent in 2021.
As federal policy makers discuss 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 output and employee wages.
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