Today’s map examines an obstacle to state tax competitiveness in an age of increasing mobility: taxes on social capital.
Unlike corporate income taxes, which are levied on the net income (or profit) of a business, capital stock taxes are imposed on the net worth (or accumulated wealth) of a business. As such, the tax tends to penalize investment and forces businesses to pay whether or not they make a profit in a given year.
Sixteen states levy capital stock taxes (often referred to as franchise taxes, although some states also use this term for different types of taxes). Capital stock taxes aren’t always limited to C corporations either; different states have different laws regarding the types of businesses that fall under a capital stock tax. However, regardless of the entities subject to the tax, the incentive is clear: taxes on social capital discourage the accumulation of capital in a state.
Although the exact formulas and methodologies vary from state to state, capital stock taxes are generally levied on a company’s net assets, with rates ranging from a low of 0.02% in Wyoming to a maximum of 0.3% in Arkansas. Of the states that levy a capital stock tax, half place a cap on the maximum liability a company can be required to pay; the other half has no limit. Of the seven states with a cap, Georgia’s is the lowest at $5,000, while New York’s is the highest at $5 million.
In Connecticut and Massachusetts, the capital stock tax operates similarly to an alternative minimum tax, where businesses calculate both their corporate income tax and their stock capital tax and pay the highest amount.
In Georgia and Nebraska, capital stock tax is based on a fixed dollar payment schedule, rather than a percentage of net assets, with tax rates decreasing as taxable capital increases.
|State||Highest tax rate||Maximum payout|
|Connection (a, b)||0.21%||$1,000,000|
(a) The taxpayer pays the greater of corporate income tax or capital stock tax.
(b) The tax will be fully removed 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.
(e) The first $300,000 of taxable capital is tax exempt.
(f) The tax will be fully removed by January 1, 2028.
(g) The Nebraska Corporation Occupancy 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 stock taxes are levied on a company’s net assets or market capitalization.
Sources: State laws; 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 business size and lead to adverse economic effects. As lawmakers have increasingly recognized the harmful effects of capital stock taxes, many states have reduced them or repealed them altogether. Kansas completely eliminated its capital stock tax by tax year 2011, followed by Virginia and Rhode Island in 2015 and Pennsylvania in 2016. Mississippi is in the process of phasing out its capital tax tax, which should be completely eliminated by 2028. Connecticut is also phasing out this tax, completing the process by 2024.
Only two states have retraced their steps. New York completed a phase-out of the state capital stock tax effective January 1, 2021, but the legislature decided to temporarily reinstate the tax due to budget concerns related to the coronavirus. Similarly, Illinois planned to exempt all capital stock from tax by January 1, 2024. However, after two years, Illinois reversed its phase-out plan and instead opted to freeze the franchise tax exemption at $1,000.
States can better position themselves for success by moving away from economically damaging taxes like the social capital tax.