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Editorial 6 MIN READ

Oklahoma's run at zero: the 2022 attempt to kill the corporate income tax

HB 1328 cleared the House, stalled in Senate Appropriations, and died with the session, but the premise is still on the table

The Editors
Staff, Incorporator.org
6 min read Updated
Contents 6 sections
  1. What HB 1328 actually did
  2. The 4% rate in context
  3. The revenue math
  4. Who would benefit if the rate goes to zero
  5. What remains unclear
  6. Sources

klahoma came within one committee vote of zeroing out its corporate income tax this year. House Bill 1328, which would have struck the 4% rate in 68 O.S. § 2355 effective tax year 2023, passed the Oklahoma House on February 28, 2022 and then sat in Senate Appropriations until the session adjourned sine die in May. The bill is dead for the cycle. The premise is not.

For a reader tracking state-level corporate income tax repeal as a formation question, the Oklahoma story matters out of proportion to the state's size. The rate is already the lowest in the country among states that tax corporate income at all, the revenue share is small enough to plausibly backfill from severance, and the governor has signed on. If any jurisdiction is going to become the second zero-rate state after South Dakota and Wyoming on one count and join North Carolina's phase on the other, Oklahoma is the short list.

What HB 1328 actually did

HB 1328 was a one-section bill. It amended 68 O.S. § 2355 to strike the 4% rate imposed on corporate taxable income and set the rate at zero, effective for tax years beginning on or after January 1, 2023. No phase, no trigger, no sunset. The companion measure, HB 2041, took a slower path: a 0.8 percentage-point cut per year for five years, also landing at zero by TY 2027. Both moved through House Appropriations and Budget in February. HB 1328 was the one that cleared the floor, by a margin comfortable enough that the Senate version was the only question left.

Governor Kevin Stitt endorsed the package in his February 7, 2022 State of the State address, framing the corporate rate and the top individual rate as twin deliverables. The House leadership moved HB 1328 first because it was the cleaner bill: one rate, one section, one date.

It did not make it out of Senate Appropriations. Chair Roger Thompson declined to hear it before the deadline, citing revenue uncertainty tied to the federal pandemic aid runoff and the state's fiscal-year 2023 forecast. When the session adjourned on May 27, 2022, HB 1328 died with it. Under Oklahoma's two-year legislative cycle, the bill technically survives for the 2023 session without reintroduction, but the practical expectation is a fresh version with updated fiscal notes.

The 4% rate in context

Oklahoma's 4% corporate rate under 68 O.S. § 2355 is, as of the 2022 tax year, the lowest rate among the forty-four states plus D.C. that impose a corporate income tax. North Carolina is the nearest comparator at 2.5% for 2022 under N.C. Gen. Stat. § 105-130.3, but NC is already on a path to zero: Session Law 2021-180, signed in November 2021, phases the North Carolina corporate rate down to zero by tax year 2030 on a published schedule (2.25% for 2025, 2% for 2026, and stepping down to zero over the back half of the decade).

So the real question HB 1328 posed was whether Oklahoma wanted to skip the line. A clean 2023 zero rate would have put Oklahoma ahead of North Carolina on the calendar by seven years and would have meant the state was the first in the country in the modern era to repeal an existing corporate income tax in a single step.

The revenue math

The Oklahoma State Chamber's fiscal note pegged the HB 1328 revenue hit at roughly $200 million a year, based on FY 2021 collections. For a state with total General Revenue Fund collections near $7 billion that year, the corporate tax is a thin slice, well under 3% of the fund. The Oklahoma Tax Commission's FY 2021 annual report puts corporate income tax collections in the same range.

Two things carry the backfill argument. The first is oil and gas severance under 68 O.S. § 1001 et seq., which runs 7% on production once well incentives expire. Severance receipts are volatile but ran well above historical averages during 2021 and the first half of 2022 on the back of elevated WTI prices. The second is sales tax elasticity in a state whose retail base has been running hot for two fiscal years. Neither is a stable, long-term substitute, which is precisely the reason Senate leadership wanted more runway before voting the rate to zero.

The HB 2041 five-year phase was the compromise position that never quite got written down. A 0.8-point step gives the Tax Commission a year of collections data before each subsequent cut, and the legislature keeps the option to pause if severance slips. The reason HB 1328 moved ahead of HB 2041 is ordinary: leadership wanted to see if the stronger bill could clear the chamber before the weaker one was needed.

Who would benefit if the rate goes to zero

A repealed corporate income tax changes the formation calculus only for C-corporations. Pass-through entities (S-corps, partnerships, most LLCs) already pay the Oklahoma individual income tax on flow-through income at the owner level under 68 O.S. § 2355.1A, and that tax is a separate political question. The HB 1328 repeal touched only the entity-level corporate tax. Owners of Oklahoma pass-throughs would see nothing.

Where it would matter: an operating C-corp headquartered in Oklahoma whose revenue is largely Oklahoma-sourced, whose shareholders are comfortable with Oklahoma's corporate code (Title 18), and which does not need the Delaware Court of Chancery for governance or M&A reasons. That is a narrower universe than the pitch implies. Venture-backed C-corps will still form in Delaware because their investors and counsel will ask for it; the case law at stake is worth more than four points of state tax on whatever modest Oklahoma-apportioned income exists in an early-stage company. The relevant audience is closer to privately held operating businesses, family-held C-corps, and the kind of mid-market company whose shareholders live in-state.

For that audience, a zero Oklahoma rate with a federal 21% rate under IRC § 11 puts the total entity-level burden at 21%, flat, with no state addition. That is competitive with South Dakota (no corporate income tax) and Wyoming (no corporate income tax), and ahead of Texas on the comparison that matters, because the Texas franchise tax under Tex. Tax Code § 171.002 still reaches Texas-sourced revenue at 0.375% or 0.75% depending on the line of business. A zero-rate Oklahoma with no franchise tax would, on the combined measure, sit among the lowest-burden operating-state environments in the country.

What remains unclear

Three things. First, whether the 2023 session returns with HB 1328 as written or picks up the HB 2041 phase. The Stitt administration's preference is the clean repeal; the Senate preference, inferable from how Appropriations handled the bill, is the phase. The compromise, if one emerges, is probably a triggered step-down tied to severance collections or General Revenue Fund growth, modeled on the Florida mechanism that ties rate moves to collections math.

Second, whether any backfill is enacted alongside the cut. No 2022 version paired HB 1328 with a sales-tax broadening, a severance increase, or a user-fee expansion. A quiet assumption of revenue elasticity is doing a lot of work.

Third, whether the formation market actually responds. A state going from 4% to 0% is a real cut, but the C-corp formation decision is dominated by governance considerations, not rate arbitrage, which is why Delaware collects 60% of new corporations despite charging a franchise tax and an annual report fee. Oklahoma at zero becomes a credible candidate for operators who do not need Chancery, not a replacement for Delaware among those who do.

The bill that died in May was a one-section amendment and a rounding error on the state budget. If it comes back in January, it will do so in a state whose corporate tax is already the country's thinnest, into a legislature that already voted once to strike it. The interesting question is not whether Oklahoma eventually reaches zero. It is whether it gets there before North Carolina does.

Sources

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