Today marks my 15th year at the Tax Foundation. Looking back, the world was different when I started: people still had dialup internet, Bill Clinton was president, and the Tax Foundation was just seven people in a small...
- When Did Your State Adopt Its Corporate Income Tax?
When Did Your State Adopt Its Corporate Income Tax?
While last week’s map showed when each state adopted its individual income tax, this week’s map displays when states first imposed taxes on corporate income.
(Click on the map to enlarge it. Reposting policy)
Although states had been taxing various business activities since the eighteenth century, the first state to levy a tax on corporate net income was Wisconsin in 1911. Before the end of the decade, seven other states had adopted the tax. Eight more states followed suit in the 1920s, and by 1940, 31 states had imposed a corporate income tax. In almost every case, they did so together with the adoption of a state personal income tax. It is important to note that although Hawaii has been taxing corporate earnings since 1901, it was not granted statehood until 1956.
By the middle of the twentieth century, many states began seeking ways to diversify their tax bases – and the corporate income tax was seen as a means. Thirteen more states and the District of Columbia have since adopted the tax. Ohio and Florida were the last states to join on in 1971, but Ohio repealed its original measure five years later. For many years The Buckeye State only had a corporate franchise tax and a personal property tax, but these were repealed in 2005 and replaced by the Commercial Activity Tax (CAT). The CAT is a tax on gross receipts, or a business’ total sales of goods and services. The CAT applies to nearly every type of business (not just corporations), and allows no deduction for costs or business-to-business purchases, meaning it “pyramids” throughout the production structure.
Ohio is not the only state to tax gross receipts: Washington has had a similar tax since 1935 called the “Business and Occupation Tax,” and Texas’ comparable “Margin Tax” took full effect in 2008. Both Delaware and Virginia charge a gross receipts tax on top of their corporate income tax (although Virginia’s is levied at the local level). Nevada, South Dakota, and Wyoming are the only states in the Union without either form of tax.
Michigan has by far the most storied history of corporate and business taxation. In 1953, the state instituted a Business Activities Tax (BAT), which was akin to a Value-Added Tax (VAT), calculated by taking a firm’s total sales minus purchases from other businesses and property depreciation. This tax was replaced by a standard corporate income tax in 1967. Then, less than ten years later, Michigan’s leaders changed their minds again, instituting the Single Business Tax (SBT) in lieu of a corporate income tax.
The SBT was similar in some ways to a gross receipts tax, but started with business income and then added compensation and other additions to the tax base (see page 11 here). Amidst concerns that the existing system was too costly to firms, 2008 brought yet another change to the state’s tax law – replacing the SBT with the Michigan Business Tax (MBT), which was a combination of a business income tax along with a modified gross receipts tax and some exemptions for insurance companies and financial institutions. Then, in 2012, Michigan policymakers joined 43 other states by reinstating the traditional corporate net income tax (a reform we awarded Governor Rick Snyder for).
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