A tax reform proposal being floated in Mississippi could eliminate the state’s franchise tax, which is levied on businesses and partnerships chartered within the state. Mississippi is one of 18 states with a franchise tax. The tax is imposed at a rate of $2.50 per $1,000 of capital or property, whichever is greater. Mississippi’s franchise tax rate is the sixth-highest in the nation, and Mississippi is one of the few states with no limit on the maximum payment. Lt. Gov. Tate Reeves (R) has begun to push for elimination of the corporate franchise tax as part of a tax reform package that could also include a cut in the state’s income tax.
Franchise taxes have become unreliable sources of revenue as corporate revenues decreased considerably in recent years and many companies have reorganized to avoid the tax or have moved their affiliates to jurisdictions with better tax policies. Eliminating the corporate franchise tax could dramatically improve Mississippi’s business climate and make it more competitive with its neighbors; the state currently ranks 17th on Tax Foundation’s Business Tax Climate Index.
Eliminating the franchise tax would simplify the tax code and remove a disincentive for in-state investments, which are penalized under the franchise tax system.
In an interview with Watchdog.org, economist Scott Drenkard of the Tax Foundation argues the franchise tax hurts the economy more during an economic downturn. “A capital stock tax has been called a tax on breathing,” Drenkard said. “You pay it every year regardless of profitability. Corporate income taxes, while they’re one of the most damaging taxes, the one benefit you can say over a corporate stock tax is that you only pay in profitable years.”
West Virginia is currently undergoing a ten-year phase-out of its 0.7 percent franchise tax, with full repeal taking effect in 2015. Pennsylvania is also in a franchise tax phase-out. Kansas completed its phase-out in 2011. Missouri is the most recent state to begin a phase-out, voting in 2011 on a measure that phases out its state corporate franchise tax over five years.
Franchise taxes, like all corporate taxes, are not really paid by the corporation but by customers (through increased product and service prices), employees (through lower wages), and others. Lowering or eliminating franchise taxes improves a state’s competitiveness by eliminating a double tax on business activity.
The following documents examine franchise taxes and similar taxes or document reform efforts in states such as Mississippi.
Mississippi May Eliminate Corporate Franchise Tax
Steve Wilson of Watchdog.org discusses the proposal to eliminate Mississippi’s corporate franchise tax. “Eliminating the franchise tax could help Mississippi’s tax climate for business,” he wrote. “It was ranked by the Tax Foundation in its most recent report as 17th best in the nation. The state’s corporate income tax has the nation’s 11th-lowest rate.”
Rebuilding Mississippi’s Business Tax Climate
Jonathan Williams and Chris Atkins of the Tax Foundation examine Mississippi’s tax system and recommend several areas for improvement: “Mississippi can rebuild itself by attracting new capital and providing incentives for enterprising individuals to locate within the borders of the Magnolia state.”
Research & Commentary: Franchise Taxes
Heartland Institute Senior Policy Analyst Matthew Glans examines franchise taxes and explains how different states are approaching reform. Lowering or eliminating franchise taxes improves a state’s competitiveness by removing a double tax on business, Glans notes.
Ten Principles of State Fiscal Policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Texas’s Margins Tax: Principles for Reform
Writing for The Heartland Institute, Eli Lehrer and Julie Drenner describe how the Texas margins tax works, outline the promises made at the time of its creation, describe how those promises were broken, and provide three guiding principles for policymakers.
The Franchise Tax Exception to the Federal Exemption Statute
Ronald Blasi examines the origin and history of franchise taxes, the authority of state and local governments to impose such taxes, and the legislative and judicial responses to the problems the taxes cause. He calls for elimination of the franchise tax exception to the federal exemption statute in order to promote clarity and administrative efficiency.
The Texas Margins Tax and Its Impact on the State’s Economic Competitiveness
James Quintero, Robert McDowall, and Talmadge Heflin argue Texas’s margins tax has dulled the state’s competitive edge. Without significant reform, they say, it will spell trouble for the state’s future economic prospects.
Corporate Tax Reform Will Enhance Kansas Competitiveness
Jonathan Williams and Chris Atkins of the Tax Foundation examine Kansas’s business tax structure and the Kansas corporate franchise and income taxes, in this Fiscal Fact article. They conclude Kansas should eliminate its franchise tax and reduce the corporate tax rate to, at most, 6.25 percent.
Texas Margin Tax Experiment Failing Due to Collection Shortfalls, Perceived Unfairness for Taxing Unprofitable and Small Businesses, and Confusing Rules
In a Fiscal Fact article, Joseph Henchman of the Tax Foundation notes the Texas margins tax has collected far less in revenue than expected, caused significant confusion and compliance costs, resulted in significant litigation and controversy over “cost of goods sold” definitions, and faced calls for substantial overhaul and even repeal. Hence, he writes, it should not be used as a model for tax reform in other states.
Nevada May Consider New Business Taxes
Joseph Henchman of the Tax Foundation discusses some of the ideas for new or expanded business taxes proposed in Nevada, including a corporate income tax, a gross receipts tax similar to those in Washington and Ohio, and a margins tax similar to Texas’s.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the FIRE Policy News Web site at http://news.heartland.org/insurance-and-finance, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
Whether sending an expert to your state to testify or brief your caucus, hosting an event in your state, or simply sending you further information on the topic, Heartland can assist you. If you have any questions or comments, contact Heartland Institute State Government Relations Manager Logan Pike at [email protected] or 312/377-4000.