Corporate taxes are levied on a company’s profit, which is the income remaining after it deducts operating expenses, interest payments, and investments. High corporate tax rates can lower net profit, making it more difficult to expand operations, invest in new technologies, or hire additional staff. In highly competitive sectors, companies often pass the cost of higher taxes to customers by increasing prices.

The US government uses corporate tax money to provide public services, build infrastructure such as roads, fund legal systems, and support education. A well-structured corporate tax system can encourage businesses to pursue more sustainable and socially beneficial practices by providing incentives for research and development, green energy initiatives, or community investments.

Below, we’ll examine which US states have low corporate tax rates, which have high tax rates, and what businesses should consider when they decide where to base their operations.

What’s in this article?

• Why different states charge different corporate tax rates
  
• What to consider when choosing a state for its tax structure
  
• States with the lowest corporate tax rates
  
• States with the highest corporate tax rates
  

Why different states charge different corporate tax rates

Different states charge different corporate tax rates for a variety of reasons, including the following:

• Economic development: States often use lower corporate tax rates as an incentive to attract businesses and stimulate economic growth. By providing a more favorable tax environment, a state hopes to entice companies to relocate or expand their operations within its borders. This can create jobs and increase tax revenue from other sources.

• Budgetary needs: States have varying budgetary needs based on their population sizes, infrastructure requirements, social programs, and other expenses. Higher corporate tax rates can generate more revenue to fund these initiatives.

• Political ideology: States with more conservative or pro-business stances might favor lower corporate tax rates, believing that this promotes economic freedom and encourages investment. States with more liberal or progressive ideologies might advocate for higher rates to fund social programs and address income inequality.

• Tax competition: States often try to attract businesses and investment by offering lower tax rates than their neighbors. This can lead to a “race to the bottom,” where states continually lower their rates to remain competitive.

• Tax mix: States rely on a mix of different taxes to generate revenue, including corporate income tax, personal income tax, sales tax, and property tax. The relative importance of each tax in a state’s overall revenue structure can influence the corporate tax rate. A state that relies heavily on personal income tax or sales tax might be able to afford a lower corporate tax rate than that of a state that depends more heavily on corporate income tax.

What to consider when choosing a state for its tax structure

Here are some key considerations for assessing the tax environments of states in which you might base your business.

Overall tax burden

Consider both corporate income tax and other taxes such as sales tax, property tax, gross receipts tax, unemployment insurance tax, and any industry-specific taxes. Also consider any tax incentives or credits for which your business might be eligible.

Business structure

If your business is a pass-through entity, such as a limited liability company (LLC) or an S corporation, the business income is passed through to the owners and taxed on their personal tax returns. In this case, consider both the state’s corporate and individual income tax rates.

If your business is a C corporation, then the corporate income tax rate is your primary concern. But you should also consider the individual income tax rate if you receive dividends or salaries from the company.

Industry-specific considerations

If your business is in manufacturing, look into states that have tax incentives for manufacturers, such as property tax abatements and sales tax exemptions on manufacturing equipment. Tech companies might benefit from states with research and development tax credits or incentives for investing in technology infrastructure. For retail businesses, sales tax rates and customers’ spending habits are important considerations.

Future growth

Consider whether the state’s tax structure will remain favorable as your business grows. Will you be subject to higher tax rates or lose eligibility for certain incentives as your revenue increases? And research the state’s tax policy history: has policy stayed consistent or have there been substantial changes to tax rates and regulations?

Additional factors

The following factors can also determine the cost of setting up your business in a particular state:

• Cost of living: Cost of living in a state can influence business expenses such as wages and rent.

• Workforce availability: The availability of skilled labor in your industry can affect your profit.

• Regulatory environment: Some states have more burdensome regulations than others, which can impact business operations.

States with the lowest corporate tax rates

States with the lightest tax burdens for businesses typically have a combination of low corporate income taxes, individual income taxes, and other business-related taxes. Here are some notable examples.

States with no corporate income tax

• Nevada: Nevada has no corporate or individual income taxes, although it does have a gross receipts tax and a high sales tax rate.

• Ohio: Ohio has no corporate income tax, but it imposes a state gross receipts tax. This can be advantageous for businesses with high profit margins but lower overall sales.

• South Dakota: South Dakota has no corporate or individual income taxes, low property tax rates, and a competitive sales tax rate.

• Texas: Texas has no corporate or individual income tax, but it does impose a gross receipts tax.

• Washington: Washington state has no individual or corporate income tax, but it does have a gross receipts tax for businesses.

• Wyoming: Wyoming has no corporate or individual income taxes. It also has low property taxes and a competitive sales tax rate.

States with low corporate income tax

• Colorado: Colorado has a corporate income tax rate of 4.4%, a low state sales tax rate, and a low property tax rate.

• Florida: Florida has no individual income tax, a corporate income tax rate of 5.5%, a moderate sales tax rate, and various exemptions that benefit businesses.

• Missouri: Missouri has a low corporate income tax rate of 4%, a low property tax rate, and a relatively low state sales tax rate.

• North Carolina: North Carolina has the lowest corporate income tax rate in the country at 2.5%.

• Oklahoma: Oklahoma has a low corporate income tax rate of 4%, a low property tax rate, and a relatively low state sales tax rate.

• South Carolina: South Carolina has a low corporate income tax rate of 5% and offers various credits and incentives for businesses that operate in certain sectors or engage in specific activities.

• Utah: Utah has a low corporate income tax rate of 4.55% and a moderate state sales tax rate.

States with the highest corporate tax rates

States with higher corporate tax rates often have additional regulations and costs that businesses should consider. Here are some of the states with the highest corporate tax rates:

• Alaska: While Alaska has some tax advantages such as a lack of state sales tax or individual income tax, its corporate income tax rate ranges from 0%–9.4%, depending on business income.

• California: Known for its complex regulatory environment, California also has a high corporate income tax rate of 8.84% that applies to most corporations.

• Illinois: Illinois imposes a flat corporate income tax rate of 7.0%, plus a personal property replacement tax of 2.5%, effectively making the corporate tax rate 9.5%.

• Minnesota: Minnesota has a corporate income tax rate of 9.8%, the highest in the country. The state’s tax structure can be complicated, with several brackets and rates for individual income tax.

• New Jersey: New Jersey’s corporate income tax rate ranges from 6.5%–9.0%, depending on business income.

• Pennsylvania: Pennsylvania has a flat corporate income tax rate of 7.99%, down from 9.99% in 2022.