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When Did Your State Adopt Its Corporate Income Tax?

3 min readBy: Liz Emanuel

While last week’s map showed when each state adopted its individual income 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. , 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 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. . 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 Ohio and Florida were the last states to join on in 1971, but Ohio repealed its original measure five years later.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 taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. , but these were repealed in 2005 and replaced by the Commercial Activity Tax (CAT).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 taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. 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 depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. . 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 baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. (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).

Current corporate tax rates are here in a chart, and here in a map.