The new year is just a matter of hours away, and once we ring it in, several states will be implementing changes to their 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. codes. One of the places we will be seeing a lot of action is in corporate income taxes, where many states are continuing to phase in multi-year reductions and reforms.
Five states will reduce their 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. rates in 2017:
- North Carolina will reduce its corporate tax rate from 4 percent to 3 percent on January 1, as a final installment of a comprehensive tax package that was passed in 2013 and continues to phase in. The state went from one of the highest corporate tax rates in the South at 6.9 percent in 2013 to 6 percent in 2014, then 5 percent in 2015, 4 percent in 2016, and now 3 percent in 2017. The last two years were revenue-contingent “triggers,” an innovative and effective budgeting tool that my colleague Jared Walczak covers in detail in a recent paper. The state will also lower its individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rate to 5.499 percent on January 1, down from 7.75 percent just a few years ago.
- Arizona will reduce its corporate tax rate from 5.5 percent to 4.9 percent, closing out a multi-year phase down that began in 2015, bringing the tax rate from 6.5 percent to 4.9 percent over that period. The state has made notable strides in improving its sales tax system in recent years as well.
- New Mexico will reduce its corporate tax from 6.6 percent to 6.2 percent on January 1. The reductions were paired with base-broadening which reduced the generosity of some corporate credits. In 2018, the rate will settle at 5.9 percent, down from 7.6 percent in 2013.
- The District of Columbia will reduce its corporate tax rate from 9.2 percent to 9.0 percent, as part of the phase-in of an impressive package of revenue-contingent reforms that passed in 2014.
- Finally, Indiana will reduce its corporate tax rate from 6.25 percent to 6.0 percent, but the new rate kicks in on July 1. The state has reduced its corporate tax rate on a schedule every year since 2011, moving from 8.5 percent to ultimately settle at 4.9 percent on July 1, 2021. Policymakers also paired these reforms over the years with reductions in the individual income tax, a repeal of the estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. , and reforms to the state’s business personal property taxes.
Since 2008, 15 states in total have reduced their corporate income tax rates. These reductions appear to be a growing trend in state tax policy, as corporate taxes make up a small amount of total tax collections, but have an outsized impact on business location and expansion decisions.
Corporate tax reductions end up being good news for all taxpayers, as individuals end up paying corporate taxes in the form of higher prices, lower wages, or reduced dividend payouts.
For a review of other recently implemented or scheduled tax changes in other tax instruments, check out the first few pages of our 2017 State Business Tax Climate Index.
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