Corporate income taxes are levied in 44 states. Though often thought of as a major tax revenue source for states, corporate income taxes actually only account for an average of 4.73% of state tax collections and 2.27% of state overall revenue.
In addition, the corporate income tax is extremely volatile and cannot be counted as a stable source of revenue for any state government, especially one like Utah that places an earmark around all corporate income tax revenue. The corporate income tax, like the individual income tax, must be used for public and higher education spending. In Fiscal Year 2019, Utah collected $520 million in corporate income tax off the 4.95% rate, compared to the more than $4.3 billion collected in individual income tax.
Of the 44 states that levy a corporate income tax, 31 of them have a “single” rate, including Utah. This means that there are no graduated tax brackets for corporations. This is the right policy, since the size of a corporation has no bearing on the income of the owners. Small companies can have owners with very high incomes and large corporations can have owners with low incomes. A single rate system minimizes the incentive for companies to engage in expensive and wasteful tax planning to mitigate the damage of higher marginal rates.
Every year, the Tax Foundation in Washington D.C. produces a map of where all of the states stand on their corporate income tax rates. It provides a great visual summary of where Utah stands not only in the western region but also nationally.
Iowa levies the highest top corporate tax rate at 12%. Iowa, from reforms passed in 2018, will be lowering their top corporate tax rate to 9.8% but will not be enacted until 2022, so we can expect the state to be at the top of the list for another few years. Iowa is followed by New Jersey (10.5%), Pennsylvania (9.99%), and Minnesota (9.8 %). Two other states, Alaska and Illinois, levy rates of 9% or higher.
On the other end of the spectrum, North Carolina’s flat rate of 2.5% is the lowest in the country, followed by rates in Missouri (4%) and North Dakota (4.31%). Seven other states impose top rates at or below 5%: Florida (4.458%), Colorado (4.63%), Arizona (4.9%), Utah (4.95%), and Kentucky, Mississippi, and South Carolina (5%).
Utah is in a competitive position with its corporate income tax rate, however there are a number of states with lower rates and a large number of states that are not much higher and moving lower. One of Utah’s closest competitors in the annual “Rich States, Poor States” ranking of best economic outlook among the states, North Carolina, now sits with the lowest corporate income tax rate in the nation at 2.5%.