Corporate Income Taxes

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The corporate income tax is levied on business profits of incorporated businesses. Many US businesses, including sole proprietorships, partnerships, and certain eligible corporations, are not subject to the corporate income tax. Instead, their owners must include an allocated share of the businesses’ profits in their taxable income under the individual income tax.

Forty-four states and the District of Columbia levy a corporate income tax. Ohio, Nevada, Texas, and Washington, tax corporations’ gross receipts instead of income. Delaware levies both a corporate income tax and gross receipts tax. South Dakota and Wyoming do not have a corporate income tax or gross receipts tax.

Census counts gross receipts tax revenue as general sales tax revenue, so please see our Backgrounder on general sales taxes for more on gross receipts taxes.

How much revenue do state and local governments raise from corporate income taxes?

State and local governments collected a combined $54 billion in revenue from corporate income taxes in 2016, or 2 percent of general revenue. That was a far smaller share than revenue that came from property taxes, general sales taxes, and individual income taxes.

State governments collected $46 billion in revenue from corporate income taxes in 2016, 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 government general revenue. Local government corporate income tax revenue is low in part because just seven states allowed local governments to levy the tax in 2018.

State and Local Corporate Income Tax Revenue, 2016

 

Revenue ($ billions)

Percentage of general revenue

States and local government

$54

2%

States

$46

2%

Local governments

$8

0.5%

New Hampshire’s corporate income tax provided 6 percent of its state and local general revenue, the most of any state. (New Hampshire does not have an individual income tax or general sales tax.) The District of Columbia and New York (both 4 percent), had the next-highest shares. In New York, local corporate income taxes (specifically New York City’s tax) raised more revenue ($6 billion) than its state corporate income tax ($4 billion). In no other state did local corporate taxes bring in more than $500 million in revenue.

Data: View and download each state's general revenue by source as a percentage of general revenue

Among the 44 states with broad corporate income taxes, the tax accounted for less than 2 percent of state and local general revenue in 32 states. Additionally, Census reports Ohio and South Dakota collected corporate income tax revenue in 2016 even though neither state has a broad-based 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 2016.

How much do corporate income tax rates differ across states?

In 2019, top corporate income tax rates range from 2.5 percent in North  Carolina to 12 percent in Iowa.

Data: View and download each state's top corporate income tax rate

Arizona, Colorado, Kansas, North Carolina, North Dakota, and Utah all had top rates lower than 5.0 percent. In contrast, Alaska, Illinois, Iowa, Minnesota, New Jersey, and Pennsylvania had top rates of 9.0 percent or higher.

How do multistate corporations pay state corporate income taxes?

Most states use the federal definition of corporate income as a starting point. However, states deviate from federal rules in some instances. For example, many states did not enact conforming rules when the federal government enacted “bonus depreciation” in 2002, which allowed businesses to deduct a larger portion of capital investment in the year the investment is first made. Many states will again have to decide if they want to conform or decouple from several of the corporate income tax provisions in the recently passed Tax Cuts and Jobs Act (TCJA).

Although 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 their states.

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.

Until 20 years ago, 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. Over the past two decades, however, states have moved toward formulas that weight more heavily or rely exclusively on sales within the state to apportion income (see each state’s formula in this table). In 2019, 24 states and the District of Columbia only used sales in their apportionment formula. 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.

How do states treat net operating losses?

The TCJA limited the deduction for net operating losses (NOLs) to 80 percent of taxable income. States that conform with federal rules will need to decide whether to adopt this limit or decouple and create their own rules.

Under prior federal tax law, corporations could carry back net NOLs for two years or carry them forward for up to 20 years. Thus, taxpayers who generated losses in 2016 could amend their 2014 and 2015 tax returns, reducing their tax liability for those years, or carry forward the losses to reduce their liability in future years.

The carry-back treatment of NOLs varies among the states that have a corporate income tax. Fourteen states allow a two-year carry-back, like federal rules, and three states (Louisiana, Montana, and Utah) allow a three-year carry-back. Thirty-three states and District of Columbia do not allow any carry-backs.

The TCJA eliminated the carry-back provision, so states that allow loss carry-backs will need to decide if they want to keep the rule without administration assistance from the federal government.

The new federal law allows corporations to carry forward net operating losses indefinitely. The length of NOL carry-forward periods in the states currently ranges from five years in Arkansas and Rhode Island to 20 years in 30 states and DC. Some states occasionally suspend or limit NOL deductions to raise revenue. California suspended the deduction for NOLs from 2008 to 2011, adding years to the carry-forward period to make up for the suspension. Since the Great Recession, several states have changed their treatment of NOLs; most of those changes have been to extend the number of carry-forward years to conform to the federal rules. States will need to decide whether to now conform with the indefinite federal carry forward period.

Interactive data tools

State and Local Finance Initiative Data Query System

Further reading

State Tax and Economic Review
Lucy Dadayan (reports are updated quarterly)

State Corporate Income Tax: Treatment of Net Operating Losses
Tax Policy Center

Business Franchise Taxes in the District of Columbia
Norton Francis (2013)

Note

All revenue data are from the US Census Bureau’s Annual Survey of State Government Tax Collections.  All dates in sections about revenue reference the fiscal year unless stated otherwise.

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