North Dakota's top corporate income tax rate would drop from 10.5 percent to 7 percent under legislation the state Senate approved Friday. Supporters said the overhaul is not a tax cut but is intended to more fairly reflect what companies pay in corporate taxes.

Sen. Rich Wardner, R-Dickinson, said the proposal may help change what he called an unfair perception that North Dakota has high corporate tax rates. It may improve the state's attractiveness to companies, he said.

"I don't want to make it sound like this is going to cure it all. It's not," he said. "All this is going to do, it's a small tool, moving in the right direction."

The measure trims the number of corporate income tax brackets from six to five, drops the lowest tax rate from 3 percent to 2.6 percent, and abolishes companies' ability to deduct their federal corporate tax payments from their state tax returns.

Eliminating the deduction allows the Legislature to lower state corporate rates while collecting about the same amount of tax over two years, Wardner said.

The state Tax Department estimates North Dakota will collect $91.8 million in corporate income taxes during its next two-year budget period, which begins July 1. The changes will reduce that amount by about $544,000, the agency said.

The proposal disallows North Dakota companies' ability to use current financial losses to offset taxes on profits in the previous two years, which is called a "loss carryback" provision. Sen. Joel Heitkamp, D-Hankinson, unsuccessfully tried to restore it, saying the carryback helps some local businesses.

"All we're doing is changing a perception," Heitkamp said. "And all we're doing is hurting some, and taking from others."

Senators voted 34-11 to approve the corporate tax measure. It now returns to the House for additional work.

Sen. Randy Schobinger, R-Minot, said he was dubious about the bill's usefulness as a way to attract businesses, because it does not offer a tax cut.

By juggling rates and tax brackets, eliminating the ability to apply losses against previous profits, and abolishing the federal corporate tax deduction, the Legislature is imposing many changes on companies, Schobinger said.

"We know that there are those that are going to win, and there are going to be losers within there," Schobinger said. "And I don't think that we fully comprehend who that might be, and what the effects of the tax shifts onto those people might be."

Schobinger had introduced a separate bill that sought to eliminate North Dakota's income taxes on corporations and individuals and replace the tax revenue by raising the state sales tax and applying it to more items. His bill was changed substantially before it was defeated in the North Dakota House on Monday.

Gov. John Hoeven and the state Commerce Department have pushed the tax measure approved Friday as a way of improving North Dakota's standing among states that levy corporate taxes.

Although the state's top rate is now 10.5 percent, companies actually pay a rate of 6.8 percent when the federal corporate tax deduction is taken into account, Wardner said. Shedding the deduction and lowering the rate will make North Dakota look better in tax rate rankings, he said.

The change may help North Dakota survive a screening process used by companies that are looking to expand, in which states' corporate tax rates are scrutinized, Wardner said.

North Dakota's existing top rate probably knocks the state out of the game in some situations before a company is able to analyze the beneficial effects of the federal deduction, he said.

"Then we'll have an opportunity to tell them, 'Hey, take a look at our workers comp rates. Take a look at our unemployment insurance rates. Here is the real effective rate of our corporate tax,'" Wardner said.

The bill is HB1471.