Does Your State Levy a Capital Stock Tax?

September 23, 2015

Only 18 states levy a capital stock tax, a tax on the net worth of a business. These taxes are often levied at a low percentage on the wealth of a firm. Because the tax is paid in good times and bad, businesses often find themselves using precious cash flow to pay it. In broad economic terms, capital stock taxes (referred to as franchise taxes in many states) are destructive because they disincentivize the accumulation of additional wealth, or capital, which distorts the size of firms.

In most cases, the capital stock tax is levied as a percentage of the base (net assets). The rates range from a high of 0.37 percent in Connecticut to a low of 0.000066 percent in Missouri (the rate is so low due to the fact that the tax is being phased on). Of the 18 states levying such taxes, only eight cap the maximum amount a business can pay. The lowest of these caps is in Georgia with a maximum payment of $5,000. Georgia’s tax is a bit different from other states in that it’s based on a fixed dollar payment scheduled, rather than a percentage of the tax base. Nebraska’s tax also functions in this way. In several states, the capital stock functions as a sort-of alternative minimum tax, where firms pay the greater of either corporate income tax or capital stock tax liability (this is the case in Connecticut and New York).

Several states have recognized the detrimental economic effects of these taxes and are moving away from franchise taxes as a source of revenue. Missouri is currently phasing out its capital stock tax, as is New York and Pennsylvania. West Virginia and Rhode Island just finished phasing out theirs, and Kansas recently completely repealed its tax in 2011.

Check out the map below to see whether or not your state has a capital stock tax. The table below the map shows rates and maximum payments as of January 1, 2015.
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Click on map to enlarge. (See our reposting policy here.)

Capital Stock Tax Rates as of January 1, 2015

State Tax Rate Max Payment
Alabama 0.175% $15,000
Arkansas 0.3% Unlimited
Connecticut (a) 0.37% $1,000,000
Delaware (b) 0.0350% $180,000
Georgia (c) $5,000
Illinois 0.1% $2,000,000
Louisiana 0.3% Unlimited
Massachusets (a) 0.26% Unlimited
Mississippi 0.25% Unlimited
Missouri (d) 0.006600% Unlimited
Nebraska (c) $11,995
New York (a, d) 0.15% $1,000,000
North Carolina 0.15% Unlimited
Oklahoma 0.125% $20,000
Pennsylvania (d) 0.045% Unlimited
South Carolina 0.1% Unlimited
Tennessee 0.25% Unlimited
Wyoming 0.02% Unlimited
(a) Taxpayers pay the greater of either corporate income tax liability or capital stock tax liability.
(b) Delaware corporations can pay based on authorized shares method, non-par, or assumed par value.
(c) Based on a fixed dollar payment schedule. Effective tax rates decrease as taxable capital increases.
(d) Tax is being phased out.

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A 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.