Corporate Income Taxes
The corporate income tax is levied on business profits of incorporated businesses.
Forty-four states and the District of Columbia levy a corporate income tax. Ohio, Nevada, and Washington tax corporations' gross receipts instead of income. Texas levies a franchise tax on a business's income or "margin" but the tax otherwise operates like a gross receipts tax (and the Census Bureau classifies its revenue as such). South Dakota and Wyoming do not have a corporate income tax or gross receipts tax.
Most US businesses, including sole proprietorships, partnerships, and certain eligible corporations, do not pay federal or state corporate income taxes. Instead, their owners must include an allocated share of the businesses’ profits (known as "pass-through" income) in their taxable income under the individual income tax. Excluding sole proprietorships (which comprise a majority of business tax returns), more than 80 percent of businesses were organized as flow-through entities in 2015.
- How much revenue do state and local governments raise from corporate income taxes?
- Which states rely on corporate income tax revenue the most?
- How much do corporate income tax rates differ across states?
- How do multistate corporations pay state corporate income taxes?
- Further reading
State and local governments collected a combined $56 billion in revenue from corporate income taxes in 2018, or 2 percent of general revenue. The share of state and local general revenue from corporate income taxes was far smaller than the share from property taxes, general sales taxes, and individual income taxes.
State governments collected $48 billion in revenue from corporate income taxes in 2018, or 2 percent of state general revenue. Local governments collected $8 billion in revenue from corporate income taxes, or less than 1 percent of local general revenue. Local government corporate income tax revenue is low in part because only seven states allowed local governments to levy the tax in 2018.
New Hampshire’s corporate income tax provided 6.5 percent of its state and local general revenue in 2018, the most of any state. (New Hampshire does not levy a broad-based individual income tax or general sales tax.) In no other state did the corporate income tax account for more than 4 percent of state and local general revenue. Indeed, in most states it accounted for less than 2 percent. (The District of Columbia collected 4.3 percent of its general revenue from the tax.) Tennessee and New York had the next highest shares behind New Hampshire, with 3.5 and 3.3 percent, respectively. In New York, local corporate income taxes (specifically New York City's tax) raised more revenue ($6.8 billion) than its state corporate income tax ($3.6 billion). In no other state did local corporate taxes bring in more than $600 million in revenue in 2018.
The Census Bureau reports Ohio and South Dakota collected corporate income tax revenue in 2018 even though neither state had a broad-based corporate income tax because both levy special taxes on financial institutions. The resulting revenue is less than 1 percent of state and local general revenue in both states. Nevada, Texas, Washington, and Wyoming had no corporate income tax revenue in 2018.
In 2021, top state corporate income tax rates range from 2.5 percent in North Carolina to 9.9 percent in Pennsylvania.
Arizona, Colorado, Florida, Kansas, Missouri, North Carolina, North Dakota, and Utah all had top rates lower than 5 percent. In contrast, Alaska, Illinois, Iowa, Minnesota, New Jersey, and Pennsylvania had top rates of 9 percent or higher.
Iowa had the highest top corporate tax rate in 2020, but legislation passed in 2018 lowered its top rate from 12 percent to 9.8 percent (beginning in tax year 2021). Iowa’s top corporate income tax rate had been 12 percent since 1981.
Most states use the federal definition of corporate income as the starting point for their state corporate income tax. However, states deviate from federal rules in some instances. For example, states use various rules for the treatment of net operating losses that often deviate from federal instructions.
And while states benefit from federal tax administration and enforcement by following the federal definition of corporate income, they must take additional steps for multistate corporations to determine what portion of that income is taxable in each state.
States must first establish whether a company has "nexus" in the state—that is, enough physical or economic presence to owe income tax. Next, they must determine the taxable income generated by activities in the state. For example, multistate companies often have subsidiaries in no-tax or low-tax states that hold intangible assets, such as patents and trademarks. The rent or royalty payments to those wholly owned subsidiaries may or may not be considered income of the parent company operating in another state. Finally, states must determine how much of a corporation’s taxable income is properly attributed to that state.
In the twentieth century, most states used a three-factor formula based on the Uniform Division of Income for Tax Purposes Act to determine the portion of corporate income taxable in the state. That formula gave equal weight to the shares of a corporation’s payroll, property, and sales in the state. But over the past few decades states have moved toward formulas that weight more heavily or rely exclusively on sales within the state to apportion income. As of January 2021, only five states used the traditional three-factor formula, while 26 states and the District of Columbia used only sales in their apportionment formula. The remaining states with a corporate income tax used a formula that gave greater weight to sales. By using the portion of a corporation’s sales rather than employment or property to determine tax liability, states hope to encourage companies to relocate or to expand their production operations within the states they operate in.
State Tax and Economic Review
Lucy Dadayan (reports are updated quarterly)
State Corporate Income Tax: Treatment of Net Operating Losses
Tax Policy Center (2021)
Business Franchise Taxes in the District of Columbia
Norton Francis (2013)