State franchise tax changes

Several state franchise tax changes may impact taxpayers in the current and following years. Adjustments to franchise taxes include:

• reduction in rates;
• slowing of phase-outs; and
• reinstatement of taxes.

What is a franchise tax?

States impose franchise taxes on entities for the privilege of:

• doing business in the state; or 
• existing as a corporation. 

The tax may be measured by:

• net worth; 
• capital value; or 
• on a different basis. 

Some states apply a capital or net worth-based tax as part of an overall corporate tax structure that also includes an income tax base and minimum tax.

Which states are reducing franchise tax rates?

States that are lowering franchise taxes include:

• Iowa is reducing the financial institutions franchise tax rate from 5% percent to 4.7% for tax years beginning on or after January 1, 2023. The rate is reduced by 0.3% each year after until it reaches 3.5% for tax years beginning on or after January 1, 2027.
• Louisiana eliminates the franchise tax of $1.50 for each $1,000 that is levied on the first $300,000 of taxable capital, for tax periods beginning on or after January 1, 2023. Additionally, the tax rate is reduced from $3.00 to $2.75 per $1,000 of taxable capital over $300,000. Beginning April 1, 2024, and each April thereafter, additional rate reductions may be triggered.
• Mississippi is phasing out its franchise tax of $1.50 per $1,000 of capital used, invested, or employed by decreasing the rate by $0.25 per year until it is eliminated after 2027.
• New Hampshire reduces the business enterprise tax rate from 0.6% to 0.55% of business enterprise value base for gross income over $250,000 or enterprise value base over $250,000 for tax periods ending on or after December 31, 2022. 

Have any states adjusted franchise tax phase-outs?

Connecticut slowed plans to phase out its capital base tax by 2024. The revised schedule reduces the tax imposed from a rate of 3.1 mills ($.0031) on each dollar of capital for tax years beginning prior to 2024 until the capital base tax no longer applies after the 2027 tax year.  

Are any states reinstating franchise taxes?

The New York capital base tax that had been phased out after 2020 was reinstated. The rate is 0.1875% for tax years beginning on or after January 1, 2021, and before January 1, 2024. Thereafter the tax is zero.

Other franchise tax changes

Other changes impacting franchise taxes include:

• Alabama imposes a business privilege tax with graduated rates based on taxable net worth. The $100 minimum tax will be reduced to $50 in 2023 and eliminated after 2023, except for taxpayers subject to medical cannabis business privilege tax.
• North Carolina eliminates the alternate property tax bases for computing its franchise tax, for tax years beginning on or after January 1, 2023.

Where can I find information on other tax rate changes?

A discussion of state corporate and personal income tax rate reductions may also be of interest.

Further, information on elective pass-through entity taxes and rates as recently enacted by a number of states may be useful.