Corporate Close-Up: Seven States Lower 2017 Corporate Tax Rates

Happy new year! Seven states have gotten a start on this year by lowering their corporate tax rates in 2017. These states are Arizona, Indiana, New Mexico, New York, the District of Columbia, North Carolina and New Hampshire. However, other states are moving in a different direction. Voters in Louisiana rejected a referendum to lower the state’s corporate tax rate. In Illinois, legislation is pending to raise the state’s corporate tax rate by 25 percent. States are changing their rates through a variety of mechanisms, and will likely continue to do so in future as their needs and priorities change.

For several states, these rate changes have been implemented through statutes that are designed to phase in lower tax rates. These states include Arizona, which changed its corporate income tax rate from 5.5 percent to 4.9 percent for taxable years beginning from and after Dec. 31, 2016. Similarly, Indiana has scheduled drops in the corporate income tax rate from the current corporate rate of 6.25 percent, which remains in place until July 1, 2017. After June 30, 2017 and before July 1, 2018, the Indiana rate drops to 6 percent. Indiana has scheduled its rates to drop incrementally until June 30, 2021 when the rate will reach 4.9 percent.

New Mexico has also implemented new tax brackets for the corporate income tax. The brackets for 2016 were:

  • 4.8 percent of net income up to $500,000;
  • 6.4 percent of the next $500,000 of income; and
  • 6.6 percent of taxable income over $1 million.

The new rates for 2017 in New Mexico are:

  • 4.8 percent of net income up to $500,000; and
  • 6.2 percent of taxable income over $500,000.

While the rate for the New York corporate income tax on the business income base will not change for 2017, the rate for the business capital base is dropping from 0.125 percent of business capital to 0.100 percent of the business capital base. The rate for the business capital base will continue to drop incrementally until it reaches zero for tax years beginning on or after Jan. 1, 2021.

Some states have taken a different approach in dropping their rates, and have required that the state hit specific revenue targets before the rates drop. The District of Columbia dropped its rate for 2016 to 9.2 percent from 9.4 percent, and because the district hit its revenue targets enumerated in D.C. Code Ann. § 47-181, the rate will drop again to 9.0 percent for tax years beginning in 2017.

North Carolina has implemented a similar system for dropping their rates. Because the tax revenue from collections in the General Fund for the state exceeded the targeted amount of $20.975 billion, the corporate income tax rate is dropping from 4 percent to 3 percent for taxable years beginning on or after Jan. 1, 2017.

New Hampshire is dropping the state’s business profits tax rate for tax periods ending on or after Dec. 31, 2016 from 8.5 percent to 8.2 percent. However, the state has implemented a revenue target for the next scheduled drop in the rate. Under N.H. Rev. Stat. Ann. § 77-A:2, if New Hampshire has collected at least $4.64 billion for the biennium ending June 30, 2017, the business profits rate will drop again to 7.9 percent for taxable periods ending on or after Dec. 31, 2018.

However, some other states intending to change their corporate tax rates have run into roadblocks. Louisiana had passed legislation to change the corporate tax rate from a bracketed system to a flat rate of 6.5 percent for tax years starting in 2017. However, as Nushin Huq originally noted in the Daily Tax Report, the change in the rate required a modification of the state’s constitution that was subject to a vote by Louisiana voters. The voters rejected the amendment, and Louisiana’s corporate tax rates will stay the same for 2017.

Some Illinois lawmakers, on the other hand, had planned to raise the state’s corporate tax rate in new legislation. However, a “grand bargain” that would have raised the corporate tax rate to help alleviate the state’s fiscal crisis stalled in the final days of the previous General Assembly without a vote, as reported by the Daily Tax Report’s Michael Bologna. The tax provisions have been reintroduced since the new General assembly has been sworn in and would raise the corporate tax rate to 7 percent from 5.25 percent. The outcome of the proposed legislation remains to be seen, as raising the corporate tax rate is a contentious issue.

As taxpayers move forward, rates will continue to change as states have changing methods for balancing the need to maintain fiscal stability in state budgets with attempts to attract businesses through lower tax rates.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should states lower tax rates based on state revenue targets?

For more information about this and other state tax issues, sign up for a free trial of the Bloomberg BNA Premier State Tax Library.

Follow BBNA on Twitter: @BBNAtax