Illinois Corporate Tax Hike Inches U.S. Closer to #1 Ranking Globally

 
 
January 14, 2011

Fiscal Fact No. 257

The recent move by Illinois lawmakers to increase the state's corporate tax rate from 7.3 percent to 9.5 percent is further evidence that no tax change is made in a vacuum.[1] Not only did the rate hike move Illinois from having the 21st highest overall corporate tax rate among the 50 states to having the 3rd highest, it also raised the average corporate tax rate for the nation as a whole, thus inching the U.S. closer to Japan as having the highest corporate tax rate among the leading industrialized nations.

When state lawmakers think about how their state compares, they tend to think only about their standing relative to their direct neighbors or the other 49 states. However, they need to also recognize that they are competing in a global economy and that their state corporate taxes are being levied in addition to the federal corporate tax rate of 35 percent. Because the U.S. federal rate is the highest federally imposed corporate tax rate among the 31 nations comprising the Organization for Economic Cooperation and Development (OECD), most states are effectively imposing some of the highest corporate tax rates in the world.

In order to do an apples-to-apples comparison of corporate tax rates across countries, it is necessary to combine the national tax rate with the average of any state or provincial rates. These rates are then adjusted, for example, if the federal government allows businesses to deduct taxes paid to lower levels of government.

Before Illinois raised their corporate rate, the average overall corporate tax rate for the U.S. was 39.2 percent, the second-highest overall rate among the leading industrialized nations. In 2010, Japan had the highest combined national and sub-national corporate tax rate among the 31 OECD nations, at 39.54 percent.

When we account for Illinois' new corporate rate of 9.5 percent, the overall average for the U.S. increases by a tenth of a percent to 39.3 percent, inching the nation closer to Japan's number one ranking. 

However, these national averages do not tell the whole story. As the table below shows, when we rank the overall corporate tax rate for all 50 U.S. states against the rates imposed by the other OECD nations, we find that 23 states have a higher overall corporate tax rate than Japan and all 50 states have a higher overall corporate tax rate than third-place France.

While there are reports that lawmakers in a number of states-such as Georgia[2], Idaho[3], Iowa[4], Minnesota[5], and Wisconsin[6]-are considering cutting their corporate tax rates to be more competitive nationally, this may not help the nation's global ranking in the end because Japan is preparing to cut their corporate tax rate by as much as 5 percentage points. Such a move would lower Japan's overall corporate rate below the U.S. federal rate of 35 percent.

The implication of Japan's action for U.S. states is troubling. As long as the U.S. federal corporate tax rate stands at 35 percent, even if every state abolished their state-level corporate tax to make themselves more competitive, they would still effectively be imposing the highest corporate tax rate in the industrialized world.

In other words, states are limited in how much they can do on their own to make themselves more competitive globally because the federal corporate tax rate is so out of step with the rates imposed by other industrialized nations.  Thus, the only way for the states to be more competitive with lower-tax nations such as Canada, Korea, Mexico, and the UK is if the federal corporate tax rate is cut dramatically, perhaps as low as 20 to 25 percent.

Japan is not the only country seeking to cut its corporate tax rate. On January 1, Canada's federal corporate tax rate dropped to 16.5 percent from 18 percent and Britain's Chancellor of the Exchequer, George Osborne, has pledged to cut the UK's corporate tax rate from the current level of 28 percent, to 24 percent by 2014.[7]

While Illinois may be bucking the global - and national - trend toward lower corporate tax rates, the competitiveness of all 50 U.S. states cannot improve until Washington acts to lower the federal rate.

Table 1
Comparing U.S. State Corporate Taxes to the OECD (2011)

OECD Overall Rank Country/State Federal Rate 2010 Top State/Provincial Corporate Tax Rate Combined Federal and State Rate (Adjusted) 1

Iowa 35 12 41.6

Pennsylvania 35 9.99 41.5

Minnesota 35 9.8 41.4

Illinois 35 9.5 41.2

Alaska 35 9.4 41.1

New Jersey 35 9.36 41.1

Rhode Island 35 9 40.9

Maine 35 8.93 40.8

California 35 8.84 40.7

Delaware 35 8.7 40.7

West Virginia 35 8.7 40.7

Indiana 35 8.5 40.5

New Hampshire 35 8.5 40.5

Vermont 35 8.5 40.5

Massachusetts 35 8.25 40.4

Maryland 35 8.25 40.4

Oregon 35 7.9 40.1

Wisconsin 35 7.9 40.1

Nebraska 35 7.81 40.1

Idaho 35 7.6 39.9

New Mexico 35 7.6 39.9

Connecticut 35 7.5 39.9

New York 35 7.1 39.6

Kansas 35 7 39.6
1 (2) Japan (2010 Rates) 30 11.51 39.54

Arizona 35 6.97 39.5

North Carolina 35 6.9 39.5

Montana 35 6.75 39.4
2 (1) United States 35 6.56 39.3

Alabama 35 6.5 39.2

Arkansas 35 6.5 39.2

Tennessee 35 6.5 39.2

Hawaii 35 6.4 39.2

North Dakota 35 6.4 39.2

Missouri 35 6.25 39.1

Georgia 35 6 38.9

Kentucky 35 6 38.9

Oklahoma 35 6 38.9

Virginia 35 6 38.9

Florida 35 5.5 38.6

Louisiana 35 8 38.5

Mississippi 35 5 38.3

South Carolina 35 5 38.3

Utah 35 5 38.3

*Michigan 35 4.95 38.2

Colorado 35 4.63 38.0

*Texas 35 0 35.0

*Washington 35 0 35.0

*Ohio 35 0 35.0

Nevada 35 0 35.0

South Dakota 35 0 35.0

Wyoming 35 0 35.0
2 Japan (2011 Rates) 30 11.51 34.54
3 France 34.43
34.4
4 Belgium 33.99
33.99
5 Germany 15.83 14.4 30.18
6 New Zealand 30
30
7 Spain 30
30
8 Australia 30
30
9 Mexico  30
30
10 Luxembourg 21.84 6.75 28.59
11 Canada 16.5 11.5 28
12 United Kingdom 28
28
13 Norway 28
28
14 Italy 27.5
27.5
15 Portugal 25 1.5 26.5
16 Sweden     26.3
26.3
17 Finland 26
26
18 Netherlands  25.5
25.5
19 Austria 25
25
20 Denmark 25
25
21 Korea 22 2.2 24.2
22 Greece 24
24
23 Switzerland 8.50 14.47 21.17
24 Turkey 20
20
25 Czech Republic 19
19
26 Hungary 19
19
27 Poland 19
19
28 Slovak Republic 19
19
29 Chile 17
17
30 Iceland  15
15
31 Ireland 12.5
12.5

* Ohio, Texas, and Washington state have gross receipts-style business taxes, not traditional corporate income taxes.  Michigan's gross receipts tax is not included.

1. Combined rate adjusted for federal deduction of state tax. Iowa and Louisiana are also adjusted for federal deductibility
Source: http://www.oecd.org/dataoecd/26/56/33717459.xls, Tax Foundation

Note: This report was revised on January 18, 2011 to account for a correction to the method of calculating Iowa's effective corporate income tax rate. Iowa's statutory rate is 12%, but lower due to partial federal deductibility. After accounting for the correction, Iowa's effective rate is higher than Illinois's new rate, meaning that Illinois will have the fourth-highest corporate income tax, instead of third-highest as previously reported.

[1] Some news reports have indicated that Illinois's corporate income tax is currently 4.8%. This does not include a 2.5% property replacement tax imposed on corporate income. Reference sources that cite Illinois's corporate income tax, including the Tax Foundation, the Federation of Tax Administrators, and the Illinois Department of Revenue, report it as 7.3%, including this tax.

[2]http://www.google.com/url?sa=t&source=news&cd=1&ved=0CCsQqQIwAA&url=http%3A%2F%2Fwww.talkgwinnett.net%2Fmain%2Fsection%2F6-guests%2F2076-tax-reform-council-delivers-a-promising-package&ei=5o8wTfLbOYyt8AbU1bmSCQ&usg=AFQjCNHDJ4t4Ftlz0oKD_mrMinC8GpLtbw

[3] http://idahobusinessreview.com/2011/01/10/proposal-to-cut-income-tax-well-received-%E2%80%93-mostly/

[4] http://www.chicagotribune.com/news/chi-ap-ia-branstad-inaugura,0,1126988.story

[5] http://lacrossetribune.com/news/local/article_70e3ab22-1f9b-11e0-84de-001cc4c002e0.html

[6] http://www.bloomberg.com/news/2011-01-13/walker-tax-cut-proposals-find-bipartisan-support.html

[7] Andrew Atkinson, "Osborne to Cut U.K. Company Tax Rate to 24% by 2014," Bloomberg Businessweek, June 24, 2010.

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