President Joe Biden’s proposal to raise the federal corporate tax rate to 28 percent would raise the top combined corporate income tax rate to 32.4 percent, the highest in the Organization for Economic Co-operation and Development (OECD), which would help keep the US competitive in the long run decreases – running economy growth. While the emphasis has been on the federal rate, it’s important to consider state tax rates when considering the total tax burden on corporate income.
Under current law, U.S. corporations pay federal corporate income taxes of 21 percent plus state corporate taxes of between zero and 11.5 percent, resulting in a combined top average tax rate of 25.8 percent in 2021.
If the federal corporate tax rate were raised to 28 percent this year, companies operating in 32 states and the District of Columbia would receive the highest combined corporate tax rate in the OECD, an award currently given by France at a rate of 32 , 0 percent is held. Next year France will cut its corporate tax rate to 25.8 percent, making Portugal the highest corporate tax rate in the OECD at 31.5 percent.
Companies in Iowa, Minnesota, New Jersey, and Pennsylvania would face a combined corporate tax rate of at least 35 percent. Only seven states – Ohio, Nevada, North Carolina, South Dakota, Texas, Washington, and Wyoming – would face a corporate tax rate of less than 30 percent, all of which except North Carolina waive corporate tax, which has a low tax rate of 2 .5 percent.
Corporations can deduct state corporate income tax from federal taxable income, lowering the effective federal corporate tax rate. For example, a Michigan company may deduct tax paid at a flat rate of 6 percent from a corporate income tax of 28 percent, reducing the top federal effective tax rate to 26.3 percent and producing a combined tax rate of 32.3 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 a 50 percent deduction of federal corporate tax liability, lowering the effective corporate tax rate that local corporations face. Iowa previously allowed a 50 percent federal corporate tax deduction, but lifted the provision and lowered the corporate tax rate from 12 percent to 9.8 percent in 2021.
It is important to include state corporate taxes when considering how an increase in the federal rate would affect US competitiveness. Raising the US combined company rate to the top of the OECD would encourage companies to leave the US and reduce economic performance and wages for workers across the income spectrum. By maintaining the corporate rate of 21 percent, the US remains an attractive location for corporate investments.
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