Oklahoma Adopts Franchise Tax Repeal, Eliminates Marriage Penalty

In the closing days of the 2023 legislative session, Oklahoma lawmakers repealed the state’s corporate franchise taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to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. and eliminated the marriage penaltyA marriage penalty is when a household’s overall tax bill increases due to a couple marrying and filing taxes jointly. A marriage penalty typically occurs when two individuals with similar incomes marry; this is true for both high- and low-income couples. in its 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. . Both tax changes represent a positive step forward for the state and follow recommendations made by the Tax Foundation.

Eliminating Oklahoma’s Franchise Tax

Oklahoma’s franchise tax is a capital stock tax and, unlike a 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. , is imposed on a business’s net worth rather than net profits. As a result, a business is obligated to account for and remit the capital stock tax regardless of profitability. Generally, this causes economic distortion and is especially problematic during periods of economic downturn. Oklahoma had previously sought to limit this damage by imposing a low rate and capping the maximum payment owed at $20,000. Nevertheless, the state’s franchise tax operates as a nuisance tax because businesses must track asset values and remit these taxes—costing significant amounts of time and effort. It further disincentivizes investment in the state and its repeal is a competitive and pro-growth development.

By enacting HB 1039, Oklahoma joins a growing list of states that have either repealed, plan to repeal, or have made significant changes to their capital stock tax. In Louisiana, both chambers have approved legislation phasing out the capital stock tax, which will soon go to the governor. Kansas phased out the tax prior to the 2011 tax year. West Virginia and Rhode Island did so in 2015 and Pennsylvania joined in 2016. Mississippi is in the process of phasing out its capital stock tax. Connecticut is also phasing its version down, and New York and Illinois have made substantial progress in this area of tax policy.

Estimates suggest that the elimination of the franchise tax will reduce state revenue by $55.9 million. Read another way, the Oklahoma business community will have an additional $55.9 million to make meaningful investments in the state. But far more significant than the revenue itself is the high compliance costs for this relatively small tax, meaning that the benefit to the state’s economy is much greater than the state’s fiscal loss. Moreover, Oklahoma is in a strong revenue position, and now is as good a time as any to do away with this harmful tax that makes the state less competitive overall.

Individual Income Tax and the Marriage Penalty

Oklahoma’s current tax code imposes a marriage penalty. This means that married couples filing jointly face a modest increase in their tax burden compared to filing separately. Lawmakers have passed legislation (HB 1040) that will eliminate the marriage penalty, making the state more attractive to families. This is expected to reduce state revenues by more than $5.8 million in fiscal year 2024 and $14.7 million in fiscal year 2025. Again, these decreases should be understood within the context of the state’s relatively strong revenue position.

Oklahoma’s current top rate of 4.75 percent is tied for the ninth lowest in the country and below the national median of 5.0 percent. Removing an otherwise inefficient penalty against families is a positive development.

Further Recommendations

Eliminating the marriage penalty and repealing the corporate franchise tax are pro-growth initiatives that increase the state’s competitiveness. Had these reform measures been in place at the time of our most recent State Business Tax Climate Index, Oklahoma’s rankings would have improved to 17^th, from its current rank of 23^rd.

These bills went into law without the governor’s signature, but not, it seems, because the governor disagreed with the policies embodied in these bills; rather, he had sought a broader tax package and objected to aspects of the legislatively enacted budget.

If those disagreements can be bridged in the coming years, Oklahoma will have an opportunity to build on the competitive, pro-growth, gains of eliminating the franchise tax and marriage penalty, achieving outcomes that enjoy broad support in the legislature. As we have recommended, reform measures such as flattening the individual income tax, repealing the state’s throwback rule, and shifting the state’s apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. formula from three-factor to single sales factor have the potential to greatly improve the state’s competitiveness. Had these structural reforms been enacted this legislative session, along with the elimination of the franchise tax and marriage penalty, Oklahoma would have been poised to be a top 10 state in our Index. Importantly, this could still be the case if these tax reforms are taken up again in the future.

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