Maybe Caterpillar Should Move to Minnesota

January 12, 2011

The tax world is full of ironies. On the day that the Illinois assembly passed a massive tax hike which will boost the state’s corporate income tax rate to 9.5 percent—making it the fourth highest corporate tax rate in the industrialized world when added to the 35 percent federal rate—reports from Minnesota indicate that state Senators are poised to introduce legislation to phase out the state’s corporate income tax.

Minnesota’s corporate income tax rate is 9.8 percent which, when added to the federal rate, gives the state the third-highest overall corporate income tax rate in the nation at 41.4 percent. Pennsylvania’s 9.99 percent rate is second-highest in the nation.

The top spot goes to neighboring Iowa with its a 12 percent rate—although the effective rate in Iowa is slightly lower because the state allows for the deductibility of federal taxes. Governor-elect Terry Branstad campaigned on cutting Iowa’s corporate rate in half which will undoubtedly improve the state’s attractiveness to business.

On the Tax Foundation’s State Business Tax Climate Index, Minnesota ranks a dismal 43rd while Iowa ranks even worse at 45th. By contrast, Illinois currently ranks 23rd. However, a recent Tax Foundation assessment of the first version of the tax hike plan shows that the state could fall to 35th if the plan is signed into law by the governor.

It is natural for lawmakers to become fixated on solving their own state’s budget problems, but they should not lose sight of the fact that tax changes are not made in a vacuum. While Illinois legislators seem hell-bent on solving the state’s budget problems at the expense of its business climate, other states are equally motivated to improve their state’s business climates at the expense of Illinois.

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