Fiscal Fact No. 257
The recent move by Illinois lawmakers to increase the state’s corporate 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. 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 taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. 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 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. 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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