A New Day for State Corporate Income Taxes?

With state corporate income tax receipts surging (reaching double-digit growth in 8 of the last 9 quarters, according to the Nelson A. Rockefeller Institute of Government), many state lawmakers are looking to cut corporate tax burdens to spur economic growth in their state.

The North Carolina Senate approved a state budget recently that included a cut in the state’s corporate income tax rate from 6.9 to 6.4 percent. In Pennsylvania, Governor Ed Rendell wants to reduce the state’s corporate rate to 7.99 percent from 9.99 percent, but a House panel last week passed a measure that would further lower the rate to 6.99 percent. The Pennsylvania House also passed a bill that would lower the corporate tax burden by apportioning income tax based on sales instead of property or payroll.

In today’s competitive international market corporate tax cuts are becoming a popular trend. The German cabinet recently unveiled a plan to cut that country’s corporate tax rate from 25 percent to 19 percent. The Germans are undoubtedly feeling competitive pressure from the low corporate tax rates of the new EU members in Eastern Europe.

As Andrew pointed out in an earlier post, taxes matter to business and states that want to encourage business investment need to pay attention to their business tax climate, including the tax rates they levy on corporate income. The Tax Foundation’s State Business Tax Climate Index measures the key features of a state’s business climate, including the tax rate and tax base, on the major taxes paid by corporations.