Exploring the Impact of Kamala Harris’s Proposed Corporate Tax Rate Increase
Vice President Kamala Harris has put forth a proposal to raise the federal corporate income tax rate to 28 percent. This adjustment would elevate the combined average top tax rate on corporate income to 32.2 percent, placing the US as the second highest within the Organisation for Economic Co-operation and Development (OECD) and potentially reducing US competitiveness and long-run economic output.
Considerations Beyond Federal Corporate Tax Rates
As policymakers assess the future federal corporate tax rate, understanding the state-level corporate taxes is crucial to grasping the total tax impact on corporate income. Currently, corporations in the United States face a federal corporate income tax rate of 21 percent, alongside state-level taxes ranging from zero to 9.8 percent. This results in a combined average top tax rate of 25.6 percent for 2024. A federal rate increase to 28 percent would push corporate tax rates above 30 percent in 43 states and the District of Columbia.
Projected State-Specific Tax Burdens
Corporations in Alaska, California, Delaware, Illinois, Maine, Minnesota, New Jersey, Pennsylvania, and Vermont would see combined rates at or above 34 percent. Notably, Minnesota’s combined rate of 35.1 percent would exceed the current OECD’s highest rate, held by Colombia at 35.0 percent.
Conversely, seven states — Ohio, Nevada, North Carolina, South Dakota, Texas, Washington, and Wyoming — would maintain a corporate rate below 30 percent, primarily due to no state corporate income tax, except for North Carolina with a modest 2.5 percent rate.
Deductible State Corporate Tax and Its Effects
Corporations can deduct state corporate income tax from their federal taxable income, subsequently reducing the effective federal rate. For instance, in Michigan, a 6 percent state tax rate deduction against a proposed 28 percent federal rate lowers the effective federal rate to 26.3 percent, leading to a combined rate of 32.3 percent. Meanwhile, Alabama allows full federal deductions against state taxes, reducing the overall corporate tax burden.
Conclusion: Balancing Competitiveness with Tax Policy
Raising the US corporate rate to one of the highest in the OECD could incentivize corporations to relocate, negatively impacting economic output and worker wages across the board. Maintaining the 21 percent corporate rate offers a balanced approach, keeping the US competitive while accounting for state-level tax contributions. Engage with your local policymakers and stay informed about changes that directly affect your financial future.
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