The Louisiana House is considering a resolution that would temporarily suspend a portion of the state’s capital stock taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. , called the Corporation Franchise Tax.
Louisiana is one of 16 states that levy capital stock taxes, which, unlike corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. es, fall on a business’s net worth (or accumulated wealth) instead of its net income (or profit). As such, the tax tends to penalize investment and requires businesses to pay regardless of whether they make a profit in a given year, or ever.
The Pelican State has two capital stock tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. s. The state taxes the first $300,000 of taxable capital at 0.15 percent, and any capital above that at 0.3 percent. This resolution would wipe out any tax liability for that bottom bracket, with the suspension extending from immediately after the resolution is passed until 60 days after the 2021 regular session adjourns. According to the fiscal note, this suspension would cost the state $10.2 million in forgone revenue.
State recovery plans should lessen the burden on businesses by shifting from capital stock taxes and other taxes that are charged regardless of profitability. Louisiana does well to target its CorporationAn S corporation is a business entity which elects to pass business income and losses through to its shareholders. The shareholders are then responsible for paying individual income taxes on this income. Unlike subchapter C corporations, an S corporation (S corp) is not subject to the corporate income tax (CIT). Franchise Tax, a burdensome tax that would target businesses that may already be struggling.
This push for a temporary repeal is an implicit recognition that the capital stock tax burdens businesses, especially those which are struggling. The Pelican State should take this opportunity to take a step back and consider why this particular tax exists in the tax code in the first place. States will need revenue both during the current crisis and the recovery, so revenue-reducing reforms in one area are likely to be offset elsewhere, but the issue policymakers have identified is an important one: the Corporation Franchise Tax is economically harmful, particularly during a downturn. While temporary tax policy is not ideal, this particular resolution is a positive move toward a more neutral tax code. The state should look to move away from this burdensome tax permanently when revenue allows.
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