Alaska Legislators Advance Modest Corporate Income Tax Bill

Alaska policymakers have advanced legislation that would alter the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. brackets to shift taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. burdens away from smaller corporations. Proponents argue that the bill will foster job creation, estimating lost revenue at a minor $3.8 million annually, but the proposal is a missed opportunity for a true overhaul.

The state’s current corporate income tax rate structure is highly graduated, with ten separate brackets and a top rate of 9.4 percent. The current and proposed corporate income tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. structures are below:

Table: Alaska Corporate Income Tax Brackets and Rates

Though raising exemption levels makes the state slightly more inviting to business, the proposed system simply lowers the tax liability on smaller businesses. It doesn’t remedy the unnecessarily complicated rate structure or address the incentive concerns associated with highly-graduated rate structures.

Progressivity in a corporate tax code is unlike progressivity in personal income taxes. The reason is that the burden of personal income taxes falls entirely on the person who files the tax return and forks over the money. That's not how corporate income taxes work. Instead, the corporation (which is just a stack of legal documents) passes on the burden of the payment to three groups of people — customers, employees and investors — and that pass-along occurs no matter what the size of the firm.

Rather than retaining the graduated-rate structure, the state could instead reduce the number of brackets in order to move to a more simple and neutral system. “Progressive” corporate income tax structures are misleading because not all of the tax burden is borne by the owners of capital. Raising bracket levels is a good start, but a better option would be to flatten the structure—a move that would make Alaska even more business-friendly.

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