May 2008

Does Iowa Have the World’s Highest Corporate Income Tax?

by Amy K. Frantz

When trying to attract businesses to our state and maintain businesses that are already here, low tax rates would be a welcome tool in the arsenal to promote Iowa’s economic growth.  Unfortunately, many elected officials in our state would rather play favorites, handing out taxpayer dollars in the form of “Iowa Values Fund” grants to the lucky few companies, while shunning tax relief that could help all Iowa businesses, existing and potential.

In this global economy, how does Iowa’s corporate tax rate stack up against the developed countries around the world?  According to author Scott A. Hodge of the Tax Foundation, Iowa not only has the highest corporate income tax rate of any state in America, but has a higher corporate tax rate than any developed country in the world.[1]

Iowa’s corporate income tax rates range from six percent on the first $25,000 of net taxable income to 12 percent on income greater than $250,000.[2]  No other state has a double-digit tax rate on corporate income.  The next highest state rate is Pennsylvania at 9.99 percent.

Tax Foundation’s report takes a look at the corporate income tax rates faced by businesses in each state, and compares those rates to those in other Organization for Economic Co-operation and Development[3] (OECD) countries.  “When the state rates are combined with the federal rate (and accounting for federal deductibility), states are effectively imposing a corporate tax rate which ranges from 35 percent to 41.6 percent,” said Mr. Hodge.[4] Iowa tips the top of that scale, with the combined federal and state corporate income tax rate (adjusted) of 41.6 percent.

Many states in our nation, not just Iowa, do not stack up very well when compared to other developed countries.  Twenty-four “U.S. states have a combined corporate tax rate higher than top-ranked Japan,” whose combined corporate tax rate is 39.54 percent.  “All 50 states have a combined corporate tax rate higher than fifth-ranked France.”  That’s right – every state in America has a higher corporate income tax rate than all but four developed countries around the world!

In many parts of the world, the recent trend has been one of cutting corporate income tax rates. “This shift to lower corporate tax rates is driven largely by tax competition.  Thanks to globalization, it is much easier for capital to cross national borders, and investors naturally prefer lower-tax jurisdictions,” said Daniel J. Mitchell, Senior Fellow at the Cato Institute.[5]

In 1986 President Ronald Reagan worked to lower the federal corporate income tax rate to 34 percent, down from 46 percent. “Every developed nation except the United States has reduced corporate rates since the Reagan tax cut in 1986.”[6]  Reducing the corporate income tax continues in other countries.  “In just the past two months, at least six countries have announced plans to cut their corporate tax rates: Canada, Hong Kong, Korea, South Africa, Spain, and Taiwan.”[7]

Why should we be concerned that our corporate income tax rates are higher than most of the developed countries around the world? “The U.S. corporate tax system…discourages growth and undermines job creation.  High tax rates are driving jobs and investment abroad.”[8]

Here in Iowa, businesses are faced with high corporate income tax rates and the additional burden of high commercial property taxes as well.  Our elected leaders should take a lesson from the developed nations around the globe, and reduce the tax burden on the businesses that are operating in our state and encourage more business development in Iowa.

Amy K. Frantz is Senior Research Analyst at Public Interest Institute. 

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation. They are brought to you in the interest of a better-informed citizenry.

[1] Scott A. Hodge, “U.S. States Lead the World in High Corporate Taxes,” Tax Foundation Fiscal Fact No. 119, March 18, 2008, <http://www.taxfoundation.org/publications/show/22917.html> (April 17, 2008).

[2] 2008 State Tax Handbook, CCH, Chicago, IL, p. 96.

[3] The OECD currently has 30 member-countries.  For more information, visit www.oecd.org.

[4] Hodge.

[5] Daniel J. Mitchell, “Corporate Taxes: America Is Falling Behind,” Cato Institute Tax & Budget Bulletin, No. 48, July 2007, < http://www.cato.org/pubs/tbb/tbb_0707_48.pdf> (April 21, 2008).

[6] Ibid.

[7] Hodge.

[8] Mitchell.