Five states have either eliminated or begun the phase-out of their 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. es in the past five years. If Lt. Governor Tate Reeves has his way, Mississippi could be next in line.
Reeves is touting a tax relief package that decreases individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. burdens and phases out the state’s antiquated franchise tax over ten years. The proposal has the support of the state’s governor, Phil Bryant.
Mississippi’s franchise tax is imposed on $2.50 per $1,000 worth of business capital and property, what Lt. Governor Reeves has appropriately characterized as an “investment penalty.” It is paid by all entities doing business in the state, even if they’re inactive. A minimum annual payment of $25 ensures the tax’s applicability even to entities without any net worth.
Franchise taxes, also known as capital stock taxes, are levied on a corporation’s net worth, often—as in Mississippi—in addition to 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. Because they’re based on net worth, such taxes do not take account of profitability or cash flow, so while a company that has posted losses wouldn’t owe corporate income taxes, it would still have to pay franchise taxes.
Franchise taxes also penalize business growth, as a company that pours revenue into capital investment experiences a higher tax burden than those that do not. Franchise taxes favor profit-taking over investment, expansion, and growth.
Eighteen states levy some sort of capital stock tax, though several states are in the process of eliminating them. Kansas eliminated its capital stock tax in 2011, and Rhode Island and West Virginia completed their phase-outs just this year. New York and Pennsylvania are currently phasing theirs out. Currently, Mississippi’s capital stock tax is tied for fifth-highest in the nation.
Of the states that impose capital stock taxes, eight mitigate the burden by capping the maximum payment. Four states allow corporations to pay the higher of their capital stock or income tax, not both. Connecticut and New York include both provisions. Mississippi has neither, and among states with similar policies, only one (Louisiana) has a higher rate. In Mississippi, corporations are double-taxed, paying both the corporate income tax and an uncapped franchise tax. Mississippi’s franchise tax generated $242 million in revenue (before credits) in FY 2014, covering about 1.1 percent of its total annual budget.
The Reeves proposal also includes the five-year phase-out of the state’s 3 percent income 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. , which applies to the first $5,000 in income, effectively providing all taxpayers with a tax cut of $150 a year, as the first $5,000 in annual income would no longer be subject to the state income tax. The bracket’s threshold would be adjusted by $1,000 per year until fully phased out.
Finally, Reeves proposes an increase in the self-employment deduction, permitting self-employed individuals to deduct up to one-half of their self-employment taxes paid, consistent with the federal tax code.
Southern states like Mississippi remain a bastion of capital stock taxes; seven of the eighteen states still imposing them are in the South. As a region, the southern United States has seen significant economic expansion in recent decades, due in part to favorable tax policy. The continued reliance on capital stock taxes, however, is an outlier that holds these states back. Mississippi has an opportunity to change that, and neighboring states would do well to watch closely.
More on Mississippi.
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