State and Local Sales Tax Rates, 2019

State and Local Sales Tax Rates, 2019

State and Local Sales Tax Rates, 2019

Key Findings

  • Forty-five states and the District of Columbia collect statewide sales taxes.
  • Local sales taxes are collected in 38 states. In some cases, they can rival or even exceed state rates.
  • The five states with the highest average combined state and local sales tax rates are Tennessee (9.47 percent), Louisiana (9.45 percent), Arkansas (9.43 percent), Washington (9.17 percent), and Alabama (9.14 percent).
  • No state rates have changed since July 2018, when Louisiana’s declined from 5.0 to 4.45 percent.
  • The District of Columbia’s sales tax rate increased to 6 percent from 5.75 percent.
  • Sales tax rates differ by state, but sales tax bases also impact how much revenue is collected from a tax and how the tax affects the economy.
  • Sales tax rate differentials can induce consumers to shop across borders or buy products online.


Retail sales taxes are one of the more transparent ways to collect tax revenue. While graduated income tax rates and brackets are complex and confusing to many taxpayers, sales taxes are easier to understand; consumers can see their tax burden printed directly on their receipts.

In addition to state-level sales taxes, consumers also face local sales taxes in 38 states. These rates can be substantial, so a state with a moderate statewide sales tax rate could actually have a very high combined state and local rate compared to other states. This report provides a population-weighted average of local sales taxes as of January 1, 2019, to give a sense of the average local rate for each state. Table 1 provides a full state-by-state listing of state and local sales tax rates.

Combined Rates

Five states do not have statewide sales taxes: Alaska, Delaware, Montana, New Hampshire, and Oregon. Of these, Alaska allows localities to charge local sales taxes.[1]

The five states with the highest average combined state and local sales tax rates are Tennessee (9.47 percent), Louisiana (9.45 percent), Arkansas (9.43 percent), Washington (9.17 percent), and Alabama (9.14 percent). The five states with the lowest average combined rates are Alaska (1.43 percent), Hawaii (4.41 percent), Wyoming (5.36 percent), Wisconsin (5.44 percent), and Maine (5.50 percent).

State and local sales tax rates 2019, state sales tax 2019, sales tax rates 2019

State Rates

California has the highest state-level sales tax rate, at 7.25 percent.[2] Four states tie for the second-highest statewide rate, at 7 percent: Indiana, Mississippi, Rhode Island, and Tennessee. The lowest non-zero, state-level sales tax is in Colorado, which has a rate of 2.9 percent. Five states follow with 4 percent rates: Alabama, Georgia, Hawaii, New York, and Wyoming.[3]

No states have changed their statewide sales tax rates since July 2018, although the District of Columbia raised its sales taxes from 5.75 percent to 6 percent in October.[4]

Local Rates

The five states with the highest average local sales tax rates are Alabama (5.14 percent), Louisiana (5.00 percent), Colorado (4.73 percent), New York (4.49 percent), and Oklahoma (4.42 percent).

Average local rates rose the most in Florida, jumping the state from the 28th highest combined rate to the 22nd highest. The change was largely due to a 1 percent sales tax in Broward County and a 1.5 percentage-point local increase in Hillsborough County.[5] Colorado maintained its ranking, but saw 39 counties raise their sales taxes, including Central City’s increase from 4 percent to 6 percent at the start of 2019.[6]

Utah’s rank rose three spots, to 26th. This is largely due to Salt Lake County and Salt Lake City increasing their local sales taxes by and 0.25 and 0.5 percent, respectively.[7]

Nebraska saw the largest decrease in sales taxes this year, improving its combined state and local sales tax ranking by two spots. Lincoln drove this change by decreasing its sales tax from 1.5 percent to 1.0 percent, offsetting increases in a few smaller Nebraska municipalities.[8] While Wyoming’s ranking did not change, the state saw the year’s second-largest combined sales tax decrease when Carbon County’s 1 percent special purpose tax expired.[9]

It must be noted that some cities in New Jersey are in “Urban Enterprise Zones,” where qualifying sellers may collect and remit at half the 6.625 percent statewide sales tax rate (3.3125 percent), a policy designed to help local retailers compete with neighboring Delaware, which forgoes a sales tax. We represent this anomaly as a negative 0.03 percent statewide average local rate (adjusting for population as described in the methodology section below), and the combined rate reflects this subtraction. Despite the slightly favorable impact on the overall rate, this lower rate represents an implicit acknowledgment by New Jersey officials that their 6.625 percent statewide rate is uncompetitive with neighboring Delaware, which has no sales tax.

State & Local Sales Tax Rates as of January 1, 2019
(a) City, county, and municipal rates vary. These rates are weighted by population to compute an average local tax rate.
(b) Three states levy mandatory, statewide, local add-on sales taxes at the state level: California (1%), Utah (1.25%), and Virginia (1%). We include these in their state sales tax.
(c) The sales taxes in Hawaii, New Mexico, and South Dakota have broad bases that include many business-to-business services.
(d) Special taxes in local resort areas are not counted here. 
(e) Salem County, N.J. is not subject to statewide sales tax rates and collects a local rate of 3.3125%. New Jersey’s local score is represented as a negative.

Note: D.C.’s ranks do not affect states’ ranks, but the figures in parentheses indicate where it would rank if included.

Source: Sales Tax Clearinghouse; Tax Foundation calculations.

State State Tax Rate Rank Avg. Local Tax Rate (a) Combined Rate Rank Max Local Tax Rate
Ala. 4.00% 40 5.14% 9.14% 5 7.00%
Alaska 0.00% 46 1.43% 1.43% 46 7.50%
Ariz. 5.60% 28 2.77% 8.37% 11 5.60%
Ark. 6.50% 9 2.93% 9.43% 3 5.125%
Calif. (b) 7.25% 1 1.31% 8.56% 9 2.50%
Colo. 2.90% 45 4.73% 7.63% 16 8.30%
Conn. 6.35% 12 0.00% 6.35% 33 0.00%
Del. 46 0.00% 0.00% 47 0.00%
Fla. 6.00% 16 1.05% 7.05% 22 2.50%
Ga. 4.00% 40 3.29% 7.29% 19 5.00%
Hawaii (c) 4.00% 40 0.41% 4.41% 45 0.50%
Idaho 6.00% 16 0.03% 6.03% 37 3.00%
Ill. 6.25% 13 2.49% 8.74% 7 4.750%
Ind. 7.00% 2 0.00% 7.00% 23 0.00%
Iowa 6.00% 16 0.82% 6.82% 29 1.00%
Kans. 6.50% 9 2.17% 8.67% 8 4.00%
Ky. 6.00% 16 0.00% 6.00% 38 0.00%
La. 4.45% 38 5.00% 9.45% 2 7.00%
Maine 5.50% 29 0.00% 5.50% 42 0.00%
Md. 6.00% 16 0.00% 6.00% 38 0.00%
Mass. 6.25% 13 0.00% 6.25% 35 0.00%
Mich. 6.00% 16 0.00% 6.00% 38 0.00%
Minn. 6.88% 6 0.55% 7.43% 18 2.00%
Miss. 7.00% 2 0.07% 7.07% 21 1.00%
Mo. 4.23% 39 3.90% 8.13% 14 5.454%
Mont. (d) 46 0.00% 0.00% 47 0.00%
Nebr. 5.50% 29 1.35% 6.85% 27 2.00%
Nev. 6.85% 7 1.29% 8.14% 13 1.415%
N.H. 46 0.00% 0.00% 47 0.00%
N.J. (e) 6.63% 8 -0.03% 6.60% 30 3.313%
N.M. (c) 5.13% 32 2.69% 7.82% 15 4.125%
N.Y. 4.00% 40 4.49% 8.49% 10 4.875%
N.C. 4.75% 35 2.22% 6.97% 25 2.75%
N.D. 5.00% 33 1.85% 6.85% 28 3.50%
Ohio 5.75% 27 1.42% 7.17% 20 2.25%
Okla. 4.50% 36 4.42% 8.92% 6 6.50%
Ore. 46 0.00% 0.00% 47 0.00%
Pa. 6.00% 16 0.34% 6.34% 34 2.00%
R.I. 7.00% 2 0.00% 7.00% 23 0.00%
S.C. 6.00% 16 1.43% 7.43% 17 3.00%
S.D. (c) 4.50% 36 1.90% 6.40% 31 4.50%
Tenn. 7.00% 2 2.47% 9.47% 1 2.750%
Tex. 6.25% 13 1.94% 8.19% 12 2.00%
Utah (b) 5.95% 26 0.99% 6.94% 26 2.750%
Vt. 6.00% 16 0.18% 6.18% 36 1.00%
Va. (b) 5.30% 31 0.35% 5.65% 41 0.70%
Wash. 6.50% 9 2.67% 9.17% 4 3.90%
W.Va.  6.00% 16 0.39% 6.39% 32 1.00%
Wis. 5.00% 33 0.44% 5.44% 43 1.75%
Wyo. 4.00% 40 1.36% 5.36% 44 2.00%
D.C. 6.00% (16) 0.00% 6.00% (41) 0.00%

The Role of Competition in Setting Sales Tax Rates

Avoidance of sales tax is most likely to occur in areas where there is a significant difference between two jurisdictions’ rates. Research indicates that consumers can and do leave high-tax areas to make major purchases in low-tax areas, such as from cities to suburbs.[10] For example, evidence suggests that Chicago-area consumers make major purchases in surrounding suburbs or online to avoid Chicago’s 10.25 percent sales tax rate.[11]

At the statewide level, businesses sometimes locate just outside the borders of high sales-tax areas to avoid being subjected to their rates. A stark example of this occurs in New England, where even though I-91 runs up the Vermont side of the Connecticut River, many more retail establishments choose to locate on the New Hampshire side to avoid sales taxes. One study shows that per capita sales in border counties in sales tax-free New Hampshire have tripled since the late 1950s, while per capita sales in border counties in Vermont have remained stagnant.[12] The state of Delaware actually uses its highway welcome sign to remind motorists that Delaware is the “Home of Tax-Free Shopping.”[13] 

State and local governments should be cautious about raising rates too high relative to their neighbors because doing so will yield less revenue than expected or, in extreme cases, revenue losses despite the higher tax rate.

Sales Tax Bases: The Other Half of the Equation

This report ranks states based on tax rates and does not account for differences in tax bases (e.g., the structure of sales taxes, defining what is taxable and nontaxable). States can vary greatly in this regard. For instance, most states exempt groceries from the sales tax, others tax groceries at a limited rate, and still others tax groceries at the same rate as all other products.[14] Some states exempt clothing or tax it at a reduced rate.[15]

Tax experts generally recommend that sales taxes apply to all final retail sales of goods and services but not intermediate business-to-business transactions in the production chain. These recommendations would result in a tax system that is not only broad-based but also “right-sized,” applying once and only once to each product the market produces.[16] Despite agreement in theory, the application of most state sales taxes is far from this ideal.[17]

Hawaii has the broadest sales tax in the United States, but it taxes many products multiple times and, by one estimate, ultimately taxes 105.08 percent of the state’s personal income.[18] This base is far wider than the national median, where the sales tax applies to 34.25 percent of personal income.[19]


Sales Tax Clearinghouse publishes quarterly sales tax data at the state, county, and city levels by ZIP code. We weight these numbers according to Census 2010 population figures to give a sense of the prevalence of sales tax rates in a particular state.

It is worth noting that population numbers are only published at the ZIP code level every 10 years by the U.S. Census Bureau, and that editions of this calculation published before July 1, 2011, do not utilize ZIP code data and are thus not strictly comparable.

It should also be noted that while the Census Bureau reports population data using a five-digit identifier that looks much like a ZIP code, this is actually what is called a ZIP Code Tabulation Area (ZCTA), which attempts to create a geographical area associated with a given ZIP code. This is done because a surprisingly large number of ZIP codes do not actually have any residents. For example, the National Press Building in Washington, D.C., has its own ZIP code solely for postal reasons.

For our purposes, ZIP codes that do not have a corresponding ZCTA population figure are omitted from calculations. These omissions result in some amount of inexactitude but overall do not have a palpable effect on resultant averages because proximate ZIP code areas which do have ZCTA population numbers capture the tax rate of those jurisdictions.


Sales taxes are just one part of an overall tax structure and should be considered in context. For example, Tennessee has high sales taxes but no wage income tax, whereas Oregon has no sales tax but high income taxes. While many factors influence business location and investment decisions, sales taxes are something within policymakers’ control that can have immediate impacts.


[1] Special taxes in Montana’s resort areas are not included in our analysis.

[2] This number includes mandatory add-on taxes which are collected by the state but distributed to local governments. Because of this, some sources will describe California’s sales tax as 6.0 percent. A similar situation exists in Utah and Virginia.

[3] The sales taxes in Hawaii and South Dakota have bases that include many services and so are not strictly comparable to other sales taxes.

[4] “District of Columbia Tax Rates Changes Take Effect Monday, October 1,”, Sept. 5, 2018,

[5] “Florida (FL) Sales Tax Rate Changes,”, Jan. 1, 2019,

[6] “Colorado (CO) Sales Tax Rate Changes,”, Jan. 1, 2019,

[7] “Utah Sales and Use Tax Rates,”, Jan. 1, 2019,

[8] “Changes in Local Sales and Use Tax Rates – Effective October 1, 2018,”, Oct. 1, 2018,

[9] “Wyoming sales tax rate changes, October 2018,”, Sept. 14, 2018,

[10] Mehmet Serkan Tosun and Mark Skidmore, “Cross-Border Shopping and the Sales Tax: A Reexamination of Food Purchases in West Virginia,” Research Paper 2005-7, Regional Research Institute, West Virginia University, September 2005, See also T. Randolph Beard, Paula A. Gant, and Richard P. Saba, “Border-Crossing Sales, Tax Avoidance, and State Tax Policies: An Application to Alcohol,” Southern Economic Journal 64, no. 1 (July 1997): 293-306.

[11] Susan Chandler, “The sales tax sidestep,” Chicago Tribune, July 20, 2008,

[12] Arthur Woolf, “The Unintended Consequences of Public Policy Choices: The Connecticut River Valley Economy as a Case Study,” Northern Economic Consulting, Inc., November 2010,

[13] Len Lazarick, “Raise taxes, and they’ll move, constituents tell one delegate,”, Aug. 3, 2011,

[14] For a list, see Jared Walczak, Scott Drenkard, and Joseph Bishop-Henchman, 2019 State Business Tax Climate Index, Tax Foundation, Sept. 26, 2018,

[15] Liz Malm and Richard Borean, “How Does Your State Sales Tax See That Blue and Black (or White and Gold) Dress?” Tax Foundation, Feb. 27, 2015,

[16] Justin M. Ross, “A Primer on State and Local Tax Policy: Trade-Offs among Tax Instruments,” Mercatus Center at George Mason University, Feb. 25, 2014,

[17] For a representative list, see Jared Walczak, Scott Drenkard, and Joseph Henchman, 2019 State Business Tax Climate Index.

[18] John Mikesell, “State Retail Taxes in 2012: The Recovery Continues,” State Tax Notes (June 24, 2013): 1003.

[19] Id.

Source: Tax Policy – State and Local Sales Tax Rates, 2019

Don’t Judge Your Taxes by Your Refund

Don’t Judge Your Taxes by Your Refund

Don’t Judge Your Taxes by Your Refund

Tax filing season for 2018 opened yesterday, leaving many individuals to wonder: Did my taxes actually go down in 2018 as policymakers promised? Too many will be tempted to compare their 2017 tax refunds to their 2018 tax refunds and make a judgment that way. But that sort of analysis misses a key part of the equation: the impact that changes in tax withholding have on an individual filer’s tax refund (or taxes due).

First, let’s recap what we know about individuals’ tax liabilities in 2018 due to the Tax Cuts and Jobs Act. The new tax code lowered tax rates, doubled the standard deduction, doubled the child tax credit and expanded eligibility, and limited the alternative minimum tax. It also limited several deductions, such as for state and local taxes paid and mortgage interest.

These changes impact taxpayers differently, but the majority of Americans had a lower tax liability in 2018 than they would have otherwise. Approximately 80 percent of filers had their taxes cut by the Tax Cuts and Jobs Act, while only 5 percent saw their taxes increase. Individuals wanting to estimate their tax savings can use our tax calculator.

But, that doesn’t immediately translate into a larger (or smaller) refund at tax filing time. As part of the tax overhaul, the Treasury Department changed its withholding tables. Withholding tables instruct employers on how much to withhold from an employee’s paycheck. The amount of taxes withheld varies based on the paycheck frequency, the number of exemptions an individual claims on their W-4, and their salary.

The Treasury Department simulated how the withholding table changes would impact taxpayers in 2018. They estimated that the percentage of taxpayers who underwithhold their taxes would increase slightly, from 18 percent to 21 percent, but that the majority of taxpayers, 73 percent, would still overwithhold. Similarly, the Internal Revenue Service has estimated (subscription required) that the number of people receiving tax refunds between February and May of this year will fall by about 2.5 million, or 2.3 percent, compared to the same period in 2017. Ultimately, the effects of the new withholding tables vary depending on each taxpayer’s unique situation.

Treasury Analysis of New Withholding Tables

Source: United States Government Accountability Office, Federal Tax Withholding,

  If tax laws had not changed Under the Tax Cuts and Jobs Act

Percentage of taxpayers with wages with overwithheld tax

76% 73%

Percentage of taxpayers with wages with underwithheld tax

18% 21%

Percentage of taxpayers with wages with accurately withheld tax

6% 6%

Throughout the last year, we have estimated the tax savings of sample taxpayers. Using one of those sample taxpayers illustrates these forces at work. Kavya and Nick are a married couple making $85,000 in income, with one spouse working. They have two children, save $5,500 a year in their 401(k), and use the standard deduction. The Tax Cuts and Jobs Act lowered their tax liability by $2,254 in 2018, increasing their after-tax income by 2.65 percent.

Assuming that the working spouse is paid semi-monthly, did not receive an increase in income, and did not modify their W-4 in 2018, they would have had a refund of around $1,007 in 2017, compared to approximately $2,161 in 2018. Under the new law, their refund is larger, and they had $51 less in taxes withheld every paycheck.

Now, it’s quite possible that some individuals will experience the opposite, as the Government Accountability Office (GAO) report notes. While the aggregate figures the percentages of people over- and underwithheld are relatively constant, the individuals themselves might not be so constant. The GAO report specifies that families with children eligible for the child tax credit are more likely to be substantially overwithheld, thus receiving larger refunds, if families did not make updates to their W-4s.

But regardless of how an individual’s tax refund (or taxes due) is impacted, that is not the best way to view the tax savings under the Tax Cuts and Jobs Act.

Source: Tax Policy – Don’t Judge Your Taxes by Your Refund

The Real Lesson of 70 Percent Tax Rates on Entrepreneurial Income

The Real Lesson of 70 Percent Tax Rates on Entrepreneurial Income

The Real Lesson of 70 Percent Tax Rates on Entrepreneurial Income

Key Findings

  • Recent debates over income inequality have focused on the role of higher income tax rates during the 1930’s through the 1980s. Some assert these higher rates reduced income inequality, relative to today, when income tax rates are significantly lower.
  • These arguments fail to consider that the high individual tax rates from 1950 through 1980 largely drove entrepreneurial business income out of the individual income tax system and into the corporate income tax system.
  • This phenomenon reversed itself during the 1980s when the top individual income tax rate fell below the corporate rate and restrictions on the structure and participation in partnerships and S corporations eased.
  • These trends suggest that the high personal income rates from 1950 through 1980 simply encouraged the rich to modify the composition of their income. Their wealth was still there during this period, it was just not accounted for on individual tax returns. The shifting composition of income claimed by the rich due to changes in tax laws explains this illusion.
  • Focusing solely on the individual income tax data leads to a misjudgment on the historic level of inequality.


In a recent essay in the New York Times, economists Emmanuel Saez and Gabriel Zucman argue that the 70 percent income tax rate proposed by Rep. Alexandria Ocasio-Cortez (D-NY)is not about soaking the rich, it is about “regulating inequality and the market economy” and constraining “the immoderate, and especially unmerited, accumulation of riches.” Lastly, they say, “It is also about safeguarding democracy against oligarchy.”[1]

That is a lot to ask of any tax system. However, according to Saez and Zucman, the U.S. tax code achieved these objectives during the era from 1930 to 1980 when “the top marginal tax rate averaged 78 percent; it exceeded 90 percent from 1951 to 1963.” As a result, they say, the “United States came as close as any democratic country ever did to imposing a legal maximum income. The inequality of pretax income shrunk dramatically.”

There is a considerable amount of debate whether these high income tax rates actually reduced inequality. One study cautioned that inequality studies based on tax return data are “biased by tax base changes and missing income sources.”[2] A major factor to be considered is how the composition of reported income for the rich has changed over time in response to multiple changes in individual tax rates and the difference between those rates and the corporate tax rate.

As we will see, the high individual tax rates from 1950 through 1980 largely drove entrepreneurial business income out of the individual income tax system and into the corporate income tax system. It is likely that there were no fewer rich people during those decades than today, but many of them simply sheltered their income in traditional C corporations, which faced considerably lower tax rates. It is likely that what Saez and Zucman see as a reduction in inequality during that era is merely the migration of business income from individual income tax forms and onto corporate tax forms.

This phenomenon reversed itself during the 1980s when the top individual income tax rate fell below the corporate rate and the restrictions on the structure and participation in partnerships and S corporations eased. This resulted in an explosion of so-called pass-through businesses, such as partnerships, S corporations, and sole proprietorships that has continued through today. Income that historically would have been reported on a corporate 1120 tax form is now being reported on individual 1040 tax forms, giving the appearance of a rise in inequality. 

Saez’s Own Data Shows How High Tax Rates Impact Entrepreneurial Income

The effect of changes in tax rates on income shifting is evident in data that Saez makes available on his website. Figure 1 (below), based on Piketty-Saez data, illustrates the changing composition of income for the top one percent of taxpayers from 1950 to 2017.

In 1950, when the top individual tax rate was 91 percent, the richest taxpayers claimed roughly equal amounts of wage income and entrepreneurial income (Saez’s term for pass-through business income). Over the next thirty years, as high income tax rates persisted, the percentage of entrepreneurial income claimed by the rich dropped from roughly 35 percent in 1950 to 7.8 percent in 1981. The likely cause was the gulf between the top individual tax rate and the corporate tax rate.[3]

During the 1950s, the top tax rate on traditional C corporations was 52 percent, some 39 points lower than the top individual income tax rate. The Kennedy tax cuts in 1963 lowered the top individual tax rate to 70 percent and the corporate rate to 48 percent. As the Figure 1 indicates, the lower individual rate appears to have encouraged the rich to claim more entrepreneurial income during the latter half of the 1960s, but that surge was short-lived.      

As the 22 percentage point difference between the top individual income tax rate and the corporate rate persisted throughout the 1970s, the rich claimed less and less entrepreneurial income as a share of their overall income. The decline accelerated after 1979 when the top corporate tax rate was lowered to 46 percent and capital gains rates were cut. Over the next three years, the share of entrepreneurial income claimed by the rich dropped by more than half, from about 20 percent in 1978 to 7.8 percent in 1981.

Figure 1.

Income Composition for the top 1% of taxpayers, 1950 to 2017, Income inequality, progressive tax code, U.S. income tax code Saez and Zucman 70 percent tax rate

The Reagan Tax Cuts Made Reporting Entrepreneurial Income More Attractive

The Economic Recovery Tax Act (ERTA) of 1981 cut the top individual income tax rate from 70 percent to 50 percent while keeping the corporate tax rate at 46 percent. The capital gains rate also fell from 28 percent to 20 percent. The Saez chart above shows that the big cut in the individual tax rate halted the downward trend in the amount of entrepreneurial income claimed by the rich. This change was also fueled by an expansion in the allowable number of shareholders for S corporations and the creation of the new class of limited liability corporations (LLCs).

The spark that altered the entire way that business income is reported on tax returns today was the Tax Reform Act of 1986, which lowered the top individual tax rate from 50 percent to 28 percent, lower than the newly enacted 34 percent rate on corporate income. As the chart above demonstrates, the amount of entrepreneurial income claimed by the rich on 1040 forms soared almost immediately.

According to Saez’s data, the share of the wealthy’s income from entrepreneurial sources doubled from 11.1 percent in 1986 to 22.3 percent by 1989. At the same time, the share of their income attributable to wages dropped from 65.7 percent in 1986 to 56.7 percent in 1989.

Saez’s data shows that entrepreneurial income for the rich peaked at 32.2 percent of total income in 2016. The last time the rich claimed that much entrepreneurial income was in 1958, nearly 60 years earlier.

1986 Caused a Tectonic Shift in Business Forms and Income

As we will now see in Statistics of Income Data from the IRS, the Tax Reform Act of 1986 had a dramatic impact on the composition of business forms in America and where the income earned by those firms would be taxed. Due to the rapid growth in pass-through businesses after 1986, there is more business income claimed today on individual 1040 tax forms than on traditional corporate 1120 forms. In fact, as the chart below shows, the total amount of income earned by pass-through businesses has exceeded the amount earned by C corporations for much of the past 20 years.

Looking at the decades prior to the Reagan tax cuts, we can see that overall entrepreneurial profits were stagnant for many years while corporate profits soared until about 1980. Corporate profits collapsed around 1980, in part because of recessions, but also because of the shift away from the corporate form of business. Over the past 20 years or so, corporate profits have risen and fallen with the business cycle while the overall profits of pass-through businesses have increased steadily.

Figure 2. 

Comparing corporate and non-corporate net income 1958 to 2012, U.S. progressive tax code, income inequality, saez and zucman, 70 percent tax rate income tax inequality

1986 Also Spelled the Highpoint of the Corporate Form of Business

Figure 3illustrates the change in the number of business forms since 1958. It is clear that the fortunes of C corporations, partnerships, and S corporations have changed dramatically over the decades. 

In 1958, there were roughly an equal number of C corporations and partnerships, about 1 million each. By contrast, S corporations hardly existed at all. Over the next 20 years, the number of C corporations more than doubled to nearly 2.2 million. The number of partnerships stagnated for many years before gradually growing to about 1.4 million. By 1980, the number of S corporations had grown to about 545,000, still a relatively rare business form in comparison to the others.

The number of C corporations topped out at 2.6 million in 1986. Since then, the number of C corporations has steadily declined, and they now total about 1.6 million, the fewest since 1974.

Meanwhile, the number of pass-through businesses has skyrocketed. Since 1986, the number of S corporations grew by more than five-fold, from about 826,000 to over 4.2 million. The number of partnerships did lag for a few years following 1986, but once the LLC form took off, the number climbed to roughly 3.4 million.  This graph does not include sole proprietorships, which grew from 12.4 million in 1986, to over 23 million today.

Figure 3.

Since 1986, the number of C-corporations has declined while the number of s-corporations and partnerships has grown, entrepreneurship, u.s. progressive tax code, income inequality, 70 percent tax, saez and zucman

The Tax Cuts and Jobs Act May Turn Back Time on Inequality

The Tax Cuts and Jobs Act (TCJA) enacted in 2017 has been criticized by pundits for appearing to benefit corporations and the rich. Independent analysis proves otherwise. In fact, there are elements of the plan that may work in opposite directions to reverse the appearances of rising inequality.

One of the most significant changes in the TCJA was to cut the federal corporate tax rate from 35 percent to 21 percent to make the U.S. more competitive in the global economy. Meanwhile, the TCJA lowered the top individual tax rate from 39.6 percent to 37 percent. In addition, the TCJA created a new 20 percent deduction for certain pass-through business income.

This deduction, called the 199A deduction, lowered the effective rate for successful pass-throughs to 29.6 percent. However, the 21 percent corporate tax rate, combined with the complexity of the 199A deduction has encouraged some very large S corporations and partnerships to change into C corporation form.[4]

Indeed, a study by Penn Wharton predicted that the TCJA would “cause 235,790 U.S. business owners—77 percent of whom have incomes above at least $500,000—to switch from pass-through entity owners to C-corporations, primarily to take advantage of sheltering their income from tax by converting to C-corporations.”[5]

If the TCJA actually leads to more pass-throughs switching to C corporations, we could begin to see more and more business income shift from 1040 individual tax forms to 1120 corporate forms. So while the plan has been criticized for benefiting the rich, the TCJA is leading to a migration of income away from individual tax forms, which could result in the appearance that inequality is shrinking.


Economist Emanuel Saez and Gabriel Zucman point to the 1950s to 1980 era as proof that raising the top income tax rate to 70 percent or higher can reduce inequality and constrain the immoderate and unmerited accumulation of riches. However, Saez’s own data suggests that the high personal income rates of that era simply encouraged the rich to modify the composition of their income and effectively pushed entrepreneurial income out of the income tax system.

During that era, many rich people likely sheltered their income in their businesses, which can retain profits indefinitely, much like an IRA. Their wealth was still there during this period, it was just not accounted for on individual tax returns, which academics rely on to measure inequality.

Those days ended with the enactment of the Reagan tax cuts in 1981 and the tax reform of 1986. As the data presented here has shown, few changes in the tax code over the past 70 years have had as big of an influence on the composition of taxpayer’s income, the composition of business forms, and how business income is taxed as the Tax Reform Act of 1986. It is also clear from the data, that these factors greatly influenced the appearance of rising inequality since then.

The fall and then rise of entrepreneurial income claimed on the wealthy’s 1040 tax returns clearly tracks the seeming decline of inequality from 1950 to 1980, followed by the sudden rise in inequality since 1986. The shifting composition of income claimed by the rich due to changes in tax laws explains this illusion.

Policymakers should not ignore these changes, because it is unlikely that we could tax wealthy taxpayers at the same rates levied 60 years ago without significant economic consequences.


[1]  Emmanuel Saez and Gabriel Zucman, “Alexandria Ocasio-Cortez’s Tax Hike Is Not About Soaking the Rich,” The New York Times, January 22, 2019

[2] Gerald Auten and David Splinter, “Income Inequality in the United States: Using Tax Data to Measure Long-term Trends,” version November 12, 2017. Piketty and Saez did address some of these issues in a 2018 study. Auten and Splinter revised their report in August 23, 2018 to incorporate those revisions.

[3] This comparison ignores the second layer of tax on corporate income when investors pay tax on dividends or capital gains. An individual owner of a C corporation will also pay two layers of tax, first at the firm level, and then on her salary or the dividend she receives from the firm. However, the owner is free to set her salary to regulate the amount of individual taxes she will pay. C corporations also have the advantage over pass-through businesses in that they can retain earnings, much like an IRA, allowing owner to save through their business until they sell. Capital gains were taxed at half the rate of personal income from the 1950s through the 1970s, and the rate was falling.

[4] Miriam Gottfried, Richard Rubin and Chris Cumming, “KKR to Ditch Partnership Structure and Become Corporation,” Wall Street Journal, May 3, 2018. See also: IRS Newsroom, “Some S corporations may want to convert to C corporations,” IRS Tax Reform Tax Tip 2018-179, November 20, 2018.

[5] Penn Wharton Budget Model, “Projecting the Mass Conversion from Pass-Through Entities to C-Corporations,” June 12, 2018. 

Source: Tax Policy – The Real Lesson of 70 Percent Tax Rates on Entrepreneurial Income

Wyoming’s Proposed Corporate Tax is More Burdensome Than It Appears

Wyoming’s Proposed Corporate Tax is More Burdensome Than It Appears

Wyoming’s Proposed Corporate Tax is More Burdensome Than It Appears

Only two states forgo both corporate income and gross receipts taxes. Under legislation barreling its way through the Wyoming state legislature, it might soon be down to just South Dakota. But why would Wyoming adopt a corporate income tax—and a very narrowly targeted one at that—at a time when so many states are reducing reliance on corporate taxes because of their volatility and uncompetitiveness?

House Bill 220 creates what proponents are calling the National Retail Fairness Act, which imposes a corporate income tax of 7 percent on C corporations with more than 100 shareholders in the retail, accommodations, and food services industries. Under most circumstances, the tax would not be imposed on franchisees, though the parent company would be taxed on any income it generates from those franchise licenses.

Advocates of the proposal point to other states’ throwback rules, arguing that if Wyoming doesn’t tax this income, other states will. That reasoning is true to a point, but it’s incomplete. The reality is, HB 220 would create new tax burdens for many companies—in a state where it can already be expensive to operate.

The Throwback Rule Argument

States must “apportion” corporate income for tax purposes. Clearly, it wouldn’t do for each state to tax the entirety of a corporation’s income earned anywhere in the United States. However, determining the percentage of a company’s net revenue attributable to a given state is easier said than done, and states use a variety of formulas in making this determination. The two most common are known as evenly-weighted three-factor apportionment and single sales factor apportionment.

Under three-factor apportionment, a state looks at the percentage of a company’s sales, property, and payroll that are within that state, whereas under single sales factor, it is concerned exclusively with in-state sales. Imagine, then, a company with 30 percent of its property, 20 percent of its payroll, and 10 percent of its sales in State A. In a three-factor apportionment state, 20 percent of the company’s income would be apportioned to the state for tax purposes (the average across the three evenly-weighted factors), while under single sales factor apportionment, it would be 10 percent (the amount of sales into the state).

Sometimes, though, a state doesn’t impose any corporate taxes on economic activity within state borders. Perhaps, for instance, they’re a single sales factor state and a company does some manufacturing within their borders but has no sales there. Or, in the case of a state like Wyoming, they simply don’t tax anyone’s corporate income.

 In these cases, other states may choose to take this so-called “nowhere income”—income earned in a state but not taxed by it—and throw it back into their own base. States vary on how aggressive they are, but typically there’s some connection to the other state’s transactions (for instance, sales from State A into the untaxed state).

This is the crux of Wyoming’s argument: that Wyoming forgoing a corporate income tax doesn’t mean that this income is untaxed, just that someone else is taxing it.

Unfortunately, that’s not quite true. Throwback rules are bad policy and can lead to double taxation (interestingly, the Wyoming bill would give the state its own throwback rule!), but that doesn’t mean that there’s no additional burden if Wyoming adopts its own corporate income tax. Even if a retailer is headquartered in a state with a throwback rule, it probably isn’t shipping products from that location. A hotel chain isn’t “selling” something from one state to another. There’s some throwback income involved, of course, but much of the revenue Wyoming stands to raise would come in the form of a new tax burden, not a substitute for taxes already imposed by other states.

Implications of a New Corporate Tax

Wyoming’s proposed corporate income tax only falls on a few select industry sectors, at least initially, but it’s a foot in the door for a broader corporate tax—something Wyoming has consistently resisted over the years. In its intended form, moreover, it’s highly nonneutral, targeting certain businesses but not others. It would hit hotel and motel chains, large regional and national retail stores, and chain restaurants, but exempt many others. It would arbitrarily favor franchisee-owned stores and accommodations (taxing only the parent company’s licensing revenue) over wholly owned and operated ones. And, by hitting some low-margin companies in a part of the country where profitability may already be more difficult, it could lead to adverse consequences for the state and its residents.

There can be no doubt that, with or without this new tax, Wyoming is and would remain a low-tax state. But the state’s extremely low population density—especially outside of Cheyenne and Casper, the only two cities with more than 50,000 residents—can make it difficult to bring large retailers, hoteliers, and others to much of the state.

There are only twelve Walmarts, nine Albertsons, and five Safeways in all of Wyoming, a state substantially larger than the entirety of New England, and 95 percent of the size of Delaware, Maryland, Pennsylvania, Virginia, and the District of Columbia combined. Supermarkets are incredibly low-margin operations—profit margins are often 2 percent or lower—and it can be particularly difficult to maintain large stores in low-population areas. A 7 percent corporate income tax on these operations still means that the state has a very low tax burden, but if it makes some of these chains’ locations outside of Cheyenne, Casper, and Laramie less viable, that could have a profound impact on people’s daily lives.

Revenue Projections

Wyoming legislators should also proceed cautiously on projections that anticipate $45 million in new revenue for the state. Estimating the impact of creating a new tax is always more challenging than projecting the effect of modifying an existing tax, because the state lacks any taxpayer-reported data on which to base their estimates. In the absence of better information, Wyoming revenue scorers began with the average corporate taxes raised in North Dakota, then reduced that amount by one-third as an estimate of the effect of credits to be allowed for sales and property taxes paid, then scaled the amount down to reflect the percentage associated with the retail and hospitality sectors. Finally, the estimate was reduced to reflect businesses not organized as a corporation liable under the proposed tax.

There are a lot of assumptions here, beginning with the notion that Wyoming’s industry mix and business income is sufficiently similar to North Dakota’s to use that state’s collections as a starting point. There is undoubtedly some basis for the values chosen for subsequent reductions, but it is likely best to regard them as rough approximations—a rule of thumb layered atop a guesstimate layered atop another state’s tax code, with little sense of whether or how those initial figures were adjusted to reflect differences in what the two states regard as taxable income.

Concluding Thoughts

Others have raised questions of the constitutionality of imposing a corporate income tax on such a narrow set of industries. Certainly, there is ample precedent for excise and gross receipts taxes on specific industries, though affected corporations may seek to test the question in the context of corporate income taxes. More generally, however, Wyoming legislators seem genuinely committed to avoiding new taxes, and the intention here seems to be to redirect to Wyoming taxes that are already being collected elsewhere. Unfortunately, that’s not what HB 220 does. If the proposed tax had been in place in time to make the most recent edition of our State Business Tax Climate Index, Wyoming would have ranked third rather than first. But more importantly, Wyoming stands to lose its enviable status as one of only two states without a corporate income tax or gross receipts tax.

States seek competitive advantages, and different places can sustain different tax burdens. If you imposed New York’s tax code on Wyoming, the state would empty out. If you imposed Wyoming’s tax code on New York, the state couldn’t provide the services that are such an important selling point for that state.

For many years, Wyoming has relied on severance tax revenues in lieu of individual or corporate income taxes. The volatility of severance tax revenue understandably has policymakers considering other options, but there are ways to smooth out existing revenue without adopting a corporate income tax—however narrow—and abandoning a significant feature of the state’s tax code.

Source: Tax Policy – Wyoming’s Proposed Corporate Tax is More Burdensome Than It Appears

GILTI Minds: Why Some States Want to Tax International Income—And Why They Shouldn’t

GILTI Minds: Why Some States Want to Tax International Income—And Why They Shouldn’t

GILTI Minds: Why Some States Want to Tax International Income—And Why They Shouldn’t

The new federal tax on Global Intangible Low-Taxed Income (GILTI) is something of a misnomer: it’s certainly global and it’s definitely income, but the rest of it is, at best, an approximation. It’s not exclusively levied on low-taxed income, nor just on the economic returns from intangible property. So what is GILTI, why might states tax it, and what’s the problem with that?

As we discuss in our new paper on state tax conformity, the 2017 federal tax reform legislation represented a significant retreat from the taxation of international income, but in many respects, the opposite effect is playing out in states due to the way state tax codes are drawn to new federal provisions.

State tax Global Intangible Low-Taxed Income (GILTI)

Prior to enactment of the Tax Cuts and Jobs Act in December 2017, federal corporate income taxes applied to the entire worldwide income of a firm, with credits for foreign taxes paid. Now the U.S. operates under a mostly territorial system, with a few guardrails to curb international tax avoidance techniques like profit shifting and the parking of intellectual property in low-tax countries.

One of those guardrails is GILTI, which is intended to tax what are deemed the supernormal returns of foreign subsidiaries, less a deduction, less a calculated partial credit for foreign taxes paid. Let’s walk through what this entails.

The new GILTI inclusion is established at IRC § 951A, and it’s imposed on supernormal returns, defined as income above 10 percent of qualified business asset investment, less expenses. The idea here is that if you’re producing something with tangible property, your return on investment is probably going to be less than 10 percent of your cost of capital. If your widget-making machine is valued at $10 million, your profits off the widgets that machine makes aren’t likely to break $1 million in a given year.

But if, instead, you parked a patent or trademark in a foreign subsidiary, and then all of your other companies in the U.S. and across the world paid royalties for its use (or perhaps third parties did), then you’d have a lot of income and little or no tangible property (things you can touch and move). Basically, instead of trying to determine how much of the income of your foreign subsidiaries can be attributed to intangible property, the GILTI formula just assumes that tangible property yields “normal” returns and any “supernormal” returns are a good enough proxy for intangible income.

As you can imagine, that’s a rough approximation at best, and there are plenty of reasons why there might be supernormal returns to physical capital. But that’s how GILTI works—or rather, that’s the first step in how GILTI works.

At the federal level, the goal is to tax this income, but at a lower rate (reflective of the fact that it really is international income), and to take into account any foreign taxes paid. Remember, the last part of the name is “Low-Taxed Income,” and thus far, we’ve only established that it is global income limited in a way that at least very loosely corresponds to returns on intangible property.

This plays out, first, with a 50 percent deduction under IRC § 250, which functionally brings the federal tax rate on this income from 21 to 10.5 percent (13.125 percent after 2025, when the deduction shrinks). Next, credits are applied for 80 percent of the amount of foreign taxes paid, though the value of those credits is subject to an overall limitation equal to U.S. tax liability times foreign profits divided by worldwide profits. In general, however, the higher the foreign tax liability, the lower the residual U.S. liability.

And there you have it: a tax on global intangible low-taxed income. Sort of.

Unfortunately, many states bring GILTI into their tax codes due to how they conform to the federal law. This is already a departure from what we might think of as the typical approach to state taxation, which stops at the water’s edge, but it quickly gets even worse, because state taxation of GILTI is (accidentally) far more aggressive than federal taxation.

Many states conform to the corporate code before credits or deductions, thus bringing in GILTI under § 951A, but without the 50 percent deduction or the credits for foreign taxes paid. Consequently, state taxation of GILTI is not only aggressive, but lacks any pretense of only applying to low-taxed foreign income. In certain cases, state effective rates could rival the federal rate on GILTI. Some states are responding to this by exploring “factor relief” to reduce these costs, but taxing GILTI—even with, but especially without, the § 250 deduction and factor relief—is highly uncompetitive, and states should avoid it altogether by decoupling from this provision of the new law, which makes very little sense for states.

Separate reporting states have a particularly compelling reason to decouple, as the U.S. Constitution forbids discriminatory taxation of foreign economic activity. If a state does not include U.S.-based subsidiaries in a consolidated group for taxation, it cannot include international subsidiaries (controlled foreign corporations) within the filing group for tax purposes. Doing so would violate the foreign commerce clause, granting Congress the sole authority to regulate commerce with foreign nations and other states, by treating international income less favorably than domestic income.

States which use separate (rather than combined) reporting and nevertheless seek to tax GILTI face a serious constitutional challenge, particularly under the precedent of Kraft v. Iowa Department of Revenue (1992), a U.S. Supreme Court case striking down a business tax that allowed a deduction for dividends received for domestic, but not foreign, subsidiaries. These states should take particular pains to avoid taxing GILTI.

Generally speaking, states include GILTI in their base unless they use state-specific income starting points or expressly decouple from it. States which begin their corporate income tax calculations with federal taxable income before special deductions (line 28 of the corporate income tax form) generally forgo the corresponding 50 percent deduction, while states which begin with federal taxable income after special deductions (line 30) generally include it, though here too, states may adjust their conformity to this specific provision legislatively. Furthermore, some states have made administrative determinations that GILTI is not part of taxable income, or that it can be fully (or very nearly so) deducted as a foreign dividend.

Several states acted on GILTI taxation in 2018. Connecticut, Illinois, Massachusetts, and North Dakota determined that GILTI could be fully offset by the dividends received deduction. Georgia, Hawaii, and South Carolina legislatively decoupled from the inclusion of GILTI in the tax base. And New Jersey adopted conformity with the partially offsetting § 250 deduction.

Even now, more than a year after enactment of the Tax Cuts and Jobs Act, a significant number of states which would seem to tax GILTI (based on the way their tax codes are written) have issued no guidance to businesses. To the extent that this reflects their own reservations about including international income in the tax base, this can be a good thing—provided that states take legislative or administrative steps to establish that GILTI is not taxable, preferably by providing a subtraction for GILTI. (States can also treat GILTI as foreign dividend income and provide a full deduction under the dividends received deduction, though this approach is less comprehensive and can yield liability for certain taxpayers.) For now, however, uncertainty reigns, along with the fear that state corporate tax codes could become substantially less competitive even as the federal code has improved.

Table 11. Global Intangible Low-Taxed Income

(a) Conforms to a prior year and does not yet include GILTI.

(b) California separately taxes controlled foreign corporations and may not be able to tax GILTI in addition.

(c) Maine provides a 50 percent subtraction modification for GILTI but adds back the federal deduction.

Sources: State statutes; revenue offices; Bloomberg Tax; Council on State Taxation

State GILTI Inclusion § 250 Deduction Reporting Regime Potential Taxation of GILTI (+)
Alabama Yes Yes Separate Yes (constitutional issue)
Alaska Yes Yes Combined Yes
Arizona Yes (a) Yes (a) Combined Yes (with conformity update)
Arkansas No No Separate No
California (b) Yes (a) No (a) Combined Yes (with conformity update)
Colorado Yes Yes Combined Yes
Connecticut Yes Deductible under DRD Combined No
Delaware Yes Yes Separate Yes (constitutional issue)
Florida Yes Yes Separate Yes (constitutional issue)
Georgia No Yes Separate No
Hawaii No No Combined No
Idaho Yes No Combined Yes
Illinois Yes Deductible under DRD Combined No
Indiana Yes No Separate No
Iowa Yes Yes Separate Yes (constitutional issue)
Kansas Yes Yes Combined Yes
Kentucky No No Separate No
Louisiana Yes Yes Separate Yes (constitutional issue)
Maine Partial (c) No Combined Yes
Maryland Yes No Separate Yes (constitutional issue)
Massachusetts Yes Deductible under DRD Combined No
Michigan Yes Yes Combined No
Minnesota Yes (a) No (a) Combined Yes (with conformity update)
Mississippi Yes No Separate Yes (constitutional issue)
Missouri Yes Yes Separate Yes (constitutional issue)
Montana Yes No Combined No
Nebraska Yes Yes Combined Yes
Nevada n/a n/a Separate n/a
New Hampshire Yes (a) No (a) Combined Yes
New Jersey Yes Yes Separate Yes (constitutional issue)
New Mexico Yes No Separate Yes (constitutional issue)
New York Yes No Combined Yes
North Carolina No No Separate No
North Dakota Yes Deductible under DRD Combined No
Ohio n/a n/a Separate n/a
Oklahoma Yes Yes Separate Yes (constitutional issue)
Oregon Yes No Combined Yes
Pennsylvania Yes Deductible under DRD Separate No
Rhode Island Yes No Combined Yes
South Carolina No No Separate No
South Dakota n/a n/a Separate n/a
Tennessee Yes No Separate Yes (constitutional issue)
Texas n/a n/a Combined n/a
Utah Yes No Combined Yes
Vermont Yes Yes Combined Yes
Virginia Yes (a) Yes (a) Separate Yes (with conformity update)
Washington n/a n/a Separate n/a
West Virginia Yes Yes Combined Yes
Wisconsin No No Combined No
Wyoming n/a n/a Separate n/a
District of Columbia Yes Yes Separate Yes (constitutional issue)

Source: Tax Policy – GILTI Minds: Why Some States Want to Tax International Income—And Why They Shouldn’t

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