With origins dating back to Antebellum, the franchise tax, also known as a capital stock tax, is among North Carolina’s most antiquated taxes. To paint a picture, when the franchise tax was established in 1849, only 30 states existed, and Canada was still a British colony.
By taxing a business’s net worth annually, even when it incurs losses for the year, the franchise tax deters investment, stifles entrepreneurship, complicates accounting, and can result in double taxation. Only 15 states still levy a franchise tax, and it is high time that North Carolina policymakers eliminate this archaic policy once and for all.
Franchise Tax Background
During the 1800s, for the privilege of conducting business in the state, franchise taxes were levied on the capital stock of corporations in specific industries, such as railroads and banks. However, in 1901, lawmakers expanded capital stock taxation to “each and every corporation organized under the laws of this State or doing business in this State.”
Initially, the across-the-board franchise tax was based on a graduated scale. A business with a capital stock of $25,000 or less paid $5 with gradual increments up to a firm with a capital stock valued greater than $1,000,000, which was charged $500.
However, in 1913, the tax changed to a rate-based system. After the revision, a business was taxed “one-fifteenth of one per cent” or about 0.07 percent of the value of its capital stock, with no limit and a minimum of $7.50. By 1933, the rate and minimum tax were increased to 0.15 percent (or $1.50 per $1,000 of capital stock) and $10, respectively.
Franchise Tax in 2025
Surprisingly, other than a few minor differences, such as tax caps on the first $1,000,000, the franchise tax today still closely resembles that of 1933. The current version of the North Carolina franchise tax calculates net worth as follows:
- Net Worth = Assets – Liabilities – Accumulated Depreciation + Affiliated Indebtedness
If the company is an S corporation, it is charged one of the following:
- For a net worth ≤ $1,000,000, a flat tax of $200
- For a net worth ≥ $1,000,000, multiply the amount greater than $1,000,000 by 0.15 percent (or $1.50 per $1,000), then add $200
If the company is a C corporation, it is charged one of the following:
- For a net worth ≤ $1,000,000, a tax with a minimum of $200 and a maximum of $500
- For a net worth ≥ $1,000,000, multiply the amount greater than $1,000,000 by 0.15 percent (or $1.50 per $1,000), then add $500
Drawbacks of the Franchise Tax
The North Carolina franchise tax should be repealed due to the following drawbacks:
- Deters investment: Taxing net worth discourages the accumulation of capital, which hinders investment. This reduction in capital inhibits economic growth because investment drives productivity and job creation. Moreover, taxing a business’s capital stock disproportionately thwarts capital-intensive firms like manufacturers.
- Stifles entrepreneurship: The $200 minimum tax is especially burdensome to small businesses. For example, a business with zero employees, negative profit, and negative net worth would still owe the state $200. This creates a barrier to entry, which reduces market competition.
- Complicates accounting: In an effort to comply with the tax, businesses across the state are forced to spend millions in administrative costs each year. For example, calculating affiliated indebtedness, which refers to money a business owes to another entity with shared ownership, poses unique difficulties. This complexity makes it a target for state auditors to charge penalties for non-compliance.
- Duplicative taxation: Taxing the accumulation of wealth and capital can result in a firm being taxed multiple times. For example, a business earns a profit subject to a corporate income tax. The company uses its after-tax income to buy an asset, such as a vehicle, on which it pays sales tax. Then, the business must continue paying property and franchise taxes every year it owns the vehicle.
Furthering the argument for eliminating the franchise tax is that even with its flaws, it only generates a relatively small amount of dwindling revenue. In fact, in 2024, the revenue generated by the franchise tax comprised only 2.3 percent of the total tax revenue collected by the state.
Policy Recommendation
North Carolina policymakers should follow the example of the 35 other states that do not tax businesses’ net worth and eliminate the franchise tax in 2025. The franchise tax weakens economic growth, reduces market competition, generates wasteful administrative costs, and wrongfully causes double taxation while producing only a meager percentage of the state’s tax revenue.
