U.S. Businesses Face Higher Federal Tax Bills In 2023 Coupled With State Tax Relief

The new year brings a higher federal tax burden for US businesses. The higher federal tax bill his employer faces in 2023 is primarily due to his implementation of the Inflation Reduction Act (IRA) of 2022 and a temporary provision of the Tax Cuts and Jobs Act of 2017 (TCJA). derived from the phase-out of Recently launched state-level tax cuts are providing offsetting relief in many parts of the country, while the federal government imposes a greater burden on businesses. In fact, 2023 kicked off with some form of business tax cut in many states.

On the first day of 2023, Arkansas, Nebraska, New Hampshire, and Pennsylvania have lowered their corporate tax rates. The tax rate cuts implemented in Pennsylvania highlight how corporate tax relief recently gained bipartisan support at the state level. The Keystone tax cut, which took effect on January 1, passed the Republican-controlled Congress and was signed into law by Gov. Tom Wolfe (Democrat), lowering Pennsylvania’s corporate income tax rate from 9.99% to 8.99 on the first day. reduced to %. The tax cut is included in Gov. Wolfe’s final budget passed in 2022, which would ultimately lower Pennsylvania’s corporate tax rate to his 4.99%.

After signing the tax cuts into law, Gov. Wolf said, “Since taking office, I’ve been calling for a lower corporate net income tax rate, and I’m thrilled that the last budget did this.” , is a game changer for businesses in Pennsylvania, ensuring tax equity, making Pennsylvania a great place for businesses, and providing new, high-paying jobs for Pennsylvanians.”

This isn’t even the most significant corporate tax cut recently enacted by a Democratic governor. For example, the budget signed by North Carolina Gov. Roy Cooper (Democrat) in November 2021 would completely phase out the Tar Heel state’s corporate income tax by the end of 2030. North Carolina also implemented a capital tax cut on January 1st. , another state where a Democratic governor and Republican-led Congress worked together to pass tax cuts, as was the case in Louisiana.

Growing bipartisan support for corporate tax relief is consistent with the cross-ideological recognition and perception that the burden of corporate tax is borne by workers and consumers, not just owners of capital. During the Obama administration, the bipartisan Joint Committee on Taxation and the Congressional Budget Office updated their methodology to begin calculating the percentage of corporate taxes paid by consumers and workers in addition to shareholders. Due to the methodology change, the JCT’s analysis of IRAs released in August 2022 found that the bill’s corporate tax increase would increase the federal tax burden for taxpayers of all income levels, including those earning less than $10,000 annually. was shown.

Nebraska’s corporate tax rate was reduced from 7.81% to 5.99% on January 1, and Arkansas’ corporate tax rate was reduced from 5.9% to 5.7%. Arkansas lawmakers voted for a simple tax rate cut by passing a bill in August that would allow full business capital expenditures to continue to be allowed for state tax purposes, even if they were phased out at the federal level. exceeded.

Arkansas Senator Ben Gilmore (R) argues that while he insists on capital expenditures in full, he cannot force employers to re-deduct capital expenditures over multiple years using complex depreciation schedules. , noted that it reduces companies’ ability to hire new workers and give existing employees pay raises. Invest in expanding your business. Without a full operating expense, “Arkansas businesses would have fewer resources to invest in equipment and assets that would help expand their operations and create more jobs for Arkansas people,” Gilmore said. “These companies will be in a non-competitive position.”

The TCJA enables corporate capital expenditures for five years and then begins phasing them out over the next five years to comply with budget adjustment limits. This deduction will be reduced by 20% annually from 2023 until he is fully abolished at the end of 2027.

Even when Congress fails, governors and legislators have been successful in allowing businesses to continue deducting spending related to capital expenditures and research and development (R&D). In 2022, Tennessee became the first state to enact legislation allowing companies to fully deduct R&D expenses for state tax purposes.

Oklahoma legislators followed suit and in May 2022 went a step further by extending the R&D deduction for state tax purposes, as well as a one-year deduction for capital expenditures when calculating state tax liability. enacted a law to allow it permanently. HB 3418, signed by Governor Kevin Stitt (Republican) on May 26, codified the permanent full expenditure of capital investment and research and development. Many expect more states to enact state-level spending on capital investment and R&D in 2023, following Oklahoma, Arkansas and Tennessee.

New Hampshire’s business profits tax was reduced from 7.6% to 7.5% on January 1st. The phasing out of Granite State’s interest and dividend tax also began this month, reducing the tax rate from 5% to 4% in 2023. In 2027, New Hampshire will become her ninth non-income tax state.

In addition to the tax relief that businesses received from lower corporate tax rates, small businesses (most small businesses) filing under the personal income tax regime will benefit from personal income tax cuts implemented in 12 states in 2023. I was. Personal income tax cuts were implemented in Arizona, Idaho, Indiana, Iowa, Kentucky, Mississippi, Missouri, Nebraska, New Hampshire, New York, North Carolina and South Carolina earlier in the year. Since most small business owners file under the personal income tax system, these state income tax cuts will improve the ability of millions of small businesses across the country to create and retain jobs.

Small businesses are poised for further tax cuts in many states in 2023. More than 500,000 sole proprietors, LLCs, partnerships, and S-Corp owners filed under Wisconsin’s personal income tax system in 2020. Which her IRS data is available. Badger State now charges individuals, families and small business owners with her 7.65% personal income tax. Despite billions of dollars in tax credits enacted over the past decade, Wisconsin still has the highest income tax rate in the region, putting the state at a competitive disadvantage. . As such, Wisconsin is one of the states where legislators are most interested in significantly lowering the state’s income tax rate this year.

Senate Majority Leader Devin Lemmahue (Republican) has proposed a 3.5% flat tax, and some lawmakers want to go further. Wisconsin Senate Speaker Chris Kapenga (Republican) said in his December, “If we really wanted to differentiate and step up, I would say we wouldn’t have an income tax.” I was.

Like Wisconsin, North Carolina is a state with a Democratic governor and a Republican-run state legislature. Just as Republicans are trying to do in Badger state, leading lawmakers in North Carolina say he is interested in passing further income tax cuts in 2023, with a bipartisan veto majority. We have reason to believe that we can. North Carolina’s personal income tax rate has already been phased down to 3.99% by the end of 2026. But as Arizona moved to her 2.5% income tax and many other states are slowly reducing their income tax rates, many North Carolina legislators are aware. It is unwise to rest on their laurels. Next to Old Dominion, Gov. Glenn Youngkin (Republican) has proposed lowering Virginia’s corporate tax rate from 6% to 5%, and for small businesses he will introduce a 10% business income tax credit. bottom.

U.S. businesses face higher federal tax burdens thanks to legislation approved by Congress based on party votes last year, but governors and state legislators have decided to go in the opposite direction, It offers tax relief to employers and does so with bipartisan support. Legislators are expected to continue pursuing business tax relief in 2023 in states with both unified partisan control and split governments.

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