Nebraska should repeal its Corporation Occupation Tax
Nebraska’s Corporation Occupation Tax is a business tax levied upon a business’ net worth in Nebraska rather than the business’ profitability. This form of property taxation is generally known as a capital stock tax, and is calculated based upon the value of capital within the state. The Corporation Occupation Tax funds the Nebraska Secretary of State by imposing a tax of between $26 and $23,990 on businesses in the Cornhusker State.
Nebraska should repeal its Corporation Occupation Tax and replace the Secretary of State’s funding with general fund resources, or by imposing a simple fee. The capital stock tax is an anachronistic and poorly-structured tax that was conceived as a way to raise revenue from businesses before business income could be taxed. Yet corporate and individual income taxation provides business tax receipts based upon a business’ profitability, which is a reasonable proxy for ability to pay. While corporate taxation has its own complications, particularly at the state level, taxing corporations on their “paid in capital” makes no sense in the 21st century.
Only a minority of states have capital stock taxes, and of those who do, many are reconsidering the tax. Five states have eliminated their capital stock tax in recent years. Fifteen states retain a capital stock tax. Mississippi is presently phasing theirs out, with complete elimination due in 2028.
The capital stock tax directly disincentivizes capital formation in Nebraska. The tax is levied whether or not a business makes a profit, and could conceivably tax a business over years and years when there are no profits. Capital investments make businesses more efficient and workers more productive, leading to greater profits and higher pay. Capital stock taxes hinder that virtuous cycle of capital formation and economic growth.
Nebraska’s Corporate Occupation Tax is covered in Chapter 21, Section 303 of Nebraska’s code. It is paid in each even-numbered year with a corporation’s biennial filing with the Secretary of State. Viewing the relevant section of code shows how convoluted the capital stock tax is. There are 43 different tax rates imposed upon businesses based upon different businesses having different amounts of paid-up capital stock. For example, a corporation with $10,000 or less in paid-up capital stock owes a tax of $26, while a corporation with $100,000,000 of paid up capital stock owes a tax of $23,990.
A capital stock tax works directly against other Nebraska state incentive programs that seek to draw business investment into the state. While Nebraska might offer tax credits for jobs or investments in the state, those incentives are partially offset by the capital stock tax, which penalizes investment in the state. In addition, LB 754 from 2023 dramatically reduced Nebraska’s corporate income tax, which is scheduled to be 3.99% by 2027. Lawmakers are also considering a restoration of 100% bonus depreciation, or full expensing, to allow businesses to write off the cost of investments in the year they are incurred. Yet the competitive intent of all of these pro-growth tax reforms is contradicted by maintaining the Corporation Occupation Tax.
Like most capital stock taxes, the Corporation Occupation Tax is not a big revenue-generator. It causes undue economic harm for the revenue it brings in and is especially burdensome for new businesses that do not have profits, or even are suffering losses. Taxing a company for net worth based in the state disincentivizes further investments while running up compliance costs for old investments.
The appropriate policy is to eliminate the capital stock tax. This can be done immediately based upon revenue availability, or it can be phased out gradually. A gradual phase out could either lower the tax imposed at each valuation, or exempt the first $50,000-$100,000 of paid-in capital while progressively exempting more and more, or some combination of exemption plus rate reduction.
Nebraska’s property tax is the least competitive component of its tax code. The Corporation Occupation Tax is an especially uncompetitive and anachronistic component of the property tax, and is essentially a business physical wealth tax. The Nebraska legislature should prioritize its removal to make the tax code simpler, more transparent, and more competitive.