Does your state levy a capital tax?

This week’s card examines another obstacle to business and consumer recovery: state capital taxes. These taxes hamper economic growth at the best of times, but in times of economic contraction, they are particularly damaging to businesses struggling to remain viable. As many businesses may need time to return to profitability after the pandemic crisis, states should prioritize reducing reliance on these taxes and moving towards more neutral forms of taxation. enterprises.

Unlike corporate income tax, which is levied on the net income (or profit) of a business, capital tax is imposed on the net worth of a business (or accumulated wealth) . As such, the tax tends to penalize investment and forces companies to pay whether or not they make a profit in a given year or never.

Fifteen states levy capital taxes (often referred to as franchise taxes, although some states also use this term for different types of taxes). Capital taxes are not always limited to C corporations either; different states have different laws regarding the types of businesses that are subject to capital tax. However, regardless of which entities are subject to the tax, the incentive is clear: Taxes on the capital stock discourage the accumulation of capital in a state.

Although the exact formulas and methodologies vary from state to state, capital taxes are generally levied on the net assets of a business, with rates ranging from a minimum of 0.02% in the Wyoming to a maximum of 0.3% in Arkansas and Louisiana. Of the states that levy a capital tax, half cap the maximum liability that a business can be required to pay; the other half has no limit. Of the seven states with a cap, Georgia is the lowest at $ 5,000, while Illinois is highest at $ 2 million.

In Connecticut and Massachusetts, the capital tax works the same way as an alternative minimum tax, where businesses calculate both their corporate income tax and their capital tax and pay the amount the higher.

In Georgia and Nebraska, capital tax is based on a fixed dollar payment schedule, rather than a percentage of net assets, with tax rates falling as taxable capital increases.

State capital tax rate, January 1, 2021
State Tax rate Maximum payout
Alabama 0.175% $ 15,000
Arkansas 0.3% Unlimited
Connecticut (a, b) 0.26% $ 1,000,000
Delaware 0.035% $ 200,000
Georgia (vs) $ 5,000
Illinois (d) 0.1% $ 2,000,000
Louisiana 0.3% Unlimited
Massachusetts (a) 0.26% Unlimited
Mississippi (f) 0.175% Unlimited
Nebraska (vs) (g)
North Carolina 0.15% Unlimited
Oklahoma 0.125% $ 20,000
Caroline from the south 0.1% Unlimited
Tennessee 0.25% Unlimited
Wyoming 0.02% Unlimited

(a) The taxpayer pays the greater of the corporate income tax or the capital tax.

(b) The tax will be completely eliminated by January 1, 2024.

(c) Based on a fixed dollar payment schedule. Effective tax rates decrease as taxable capital increases.

(d) The tax rate is 0.15% for the first year and 0.1% for all subsequent years. Illinois tax is being phased out by exempting increasing amounts of capital bonds. The 2021 exemption is $ 1,000. The tax will be completely eliminated by 2024.

(e) The rate is 0.15% for the first $ 300,000 of taxable capital.

(f) The tax will be completely abolished by January 1, 2028.

(g) Nebraska corporation tax is due every two years. The maximum tax is $ 23,990 for domestic corporations (Nebraska) and $ 30,000 for foreign corporations (out of state).

Note: Capital taxes are levied on a company’s net assets or its market capitalization.

Sources: State statutes; state tax services; Bloomberg Tax.

Taxing a business on the basis of its net worth discourages the accumulation of wealth, or capital, which in turn can distort the size of businesses and lead to adverse economic effects. As lawmakers have increasingly recognized the damaging effects of capital taxes, many states have reduced or repealed them altogether. Kansas completely eliminated its capital tax before the 2011 tax year, followed by Virginia and Rhode Island in 2015, and Pennsylvania in 2016. New York completed its elimination on January 1. Mississippi is phasing out its capital tax, which is expected to be completely eliminated by 2028. Illinois and Connecticut are also phasing out this tax, with both completing the process by 2024.

The capital tax weighs on businesses that may already be in difficulty. State economic stimulus plans would benefit from a shift towards more neutral forms of taxation.

Note: This blog post is one of a series that examines tax policy obstacles to states’ post-coronavirus recovery.

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Sallie R. Loera