What’s Happening to State Capital Stock and Net Worth Taxes?

Illinois joined a growing number of states that are phasing out and repealing taxes measured by capital stock or net worth.

What Is a Capital Stock or Net Worth Tax?

The Illinois tax is commonly known as the “franchise tax.” It is a privilege tax like most other state capital or net worth taxes. Every corporation must pay the tax based on paid in capital for the privilege of doing business in the state.

In some states, corporations pay the larger of an income tax or a capital stock/net worth tax. State taxes that contain an alternative capital stock or net worth tax computation include the:

  • Connecticut corporation business tax;
  • Massachusetts corporate excise tax; and
  • New York corporation franchise tax.

How Many States Have a Capital Stock or Net Worth Tax?

 Sixteen states currently have some type of capital stock or net worth tax.

What Are Capital Stock or Net Worth Tax Rates?

Capital stock or net worth tax rates vary from state to state. Connecticut imposes the highest capital stock rate at 3.1 mils ($.0031) on each dollar of capital. Wyoming imposes the lowest tax at the rate of 2/10 of 1 mill ($.0002) on each dollar of capital.

Illinois imposes its franchise tax at:

  • $1.50 on each $1,000 of paid-in capital for the initial tax;
  • $1.00 on each $1,000 of paid-in capital for the annual tax; and
  • $1.00 on each $1,000 of additional paid-in capital.

Which States Are Phasing Out Capital Stock or Net Worth Taxes?

States that are phasing out capital stock or net worth taxes include:

  • New York by the 2021 tax year;
  • Illinois by the 2024 tax year; and
  • Mississippi by the 2028 tax year.

Connecticut also passed budget legislation that would phase out its capital stock by the 2024 tax year.

The Illinois franchise tax phase out takes place as follows:

  • the first $30 in liability is exempt from the tax for the 2020 tax year;
  • the first $1,000 in liability is exempt from the tax for the 2021 tax year;
  • the first $10,000 in liability is exempt from the tax for the 2022 tax year; and
  • the first $100,000 in liability is exempt from the tax for the 2023 tax

Corporations no longer pay the tax after the 2023 tax year.

Which States Have Repealed Capital Stock or Net Worth Taxes?

States that have repealed capital stock or net worth taxes in recent years include:

  • Missouri and Pennsylvania after the 2015 tax year;
  • Rhode Island and West Virginia after the 2014 tax year; and
  • Kansas after the 2010 tax year.

By Tim Bjur, J.D.

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CCHTaxGroup

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