West Virginia Reduces Franchise Tax, Corporate Income Tax

West Virginia’s Department of Revenue has confirmed that the state’s franchise tax, a tax levied on a business’ capital instead of its income, will be reduced from 0.2 percent to 0.1 percent for 2014. The tax is scheduled to phase out entirely in 2015. This is on top of a simultaneous reduction in the corporate income tax rate from 7 percent to 6.5 percent. That tax reduction, which became effective January 1 of this year, was predicated on the state’s rainy day fund reaching a certain threshold.

Source: West Virginia Department of Revenue

As we have written previously, phasing in these reasonable tax reductions based on growth of rainy day funds, or revenue growth more generally, is smart tax policy. Planning future tax reductions in response to healthy state finances allows responsible tax relief to complement already-occurring economic growth. Indeed, West Virginia’s proposal in 2011 to lower the corporate income tax while still phasing out the business franchise tax is an excellent example of how to do tax reform right: lowering uncompetitive rates, eliminating antiquated taxes, and preserving the state’s fiscal health.

Capital stock taxes discourage companies from investing in the technologies and equipment needed to compete in an innovative economy. They can also especially discourage large national or international firms in their location decisions, as those firms have large amounts of capital subjected to the tax, and have to apportion that capital through a complex apportionment formula. More and more states are phasing out these taxes, and we’re glad to see West Virginia continuing to implement this smart tax policy, with full repeal scheduled for 2015.

Read more on West Virginia here.

Follow Lyman on Twitter.