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Location Matters for New England

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Jared Walczak of the Tax Foundation discusses the effective tax rates for different types of businesses in the six New England states and the potential relationship with the industry mix in each state.

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Location Matters for New England

  1. 1. Jared Walczak Policy Analyst jmw@taxfoundation.org
  2. 2. Jared Walczak Policy Analyst jmw@taxfoundation.org • Allows us to see which taxes are the most significant for different types of businesses • Sheds light on the cost and significance of incentives • Helps answer the bottom-line question asked by business executives: “How much will my company pay in taxes?” • Illustrates how structural aspects of state tax codes can be as important as top line rates
  3. 3. Jared Walczak Policy Analyst jmw@taxfoundation.org • Corporate Headquarters • Research & Development Facility • Retail Store • Capital-Intensive Manufacturer • Labor-Intensive Manufacturer • Call Center • Distribution Center
  4. 4. Jared Walczak Policy Analyst jmw@taxfoundation.org • Connecticut: 19.0% (44th) • Maine: 15.1% (35th) • Massachusetts: 15.3% (37th) • New Hampshire: 12.0% (13th) • Rhode Island: 16.1% (39th) • Vermont: 13.1% (21st)
  5. 5. Jared Walczak Policy Analyst jmw@taxfoundation.org CT: 44 ME: 35 MA: 37 NH: 13 RI: 39 VT: 21 • States with best rates for corporate HQs do without one of the major taxes, such as a corporate income or sales tax • Property and sales tax burdens often substantial, UI burdens relatively modest • New firms frequently benefit from generous incentives, which can increase costs for mature operations
  6. 6. Jared Walczak Policy Analyst jmw@taxfoundation.org • Connecticut: 14.5% (42nd) • Maine: 7.8% (9th) • Massachusetts: 13.8% (37th) • New Hampshire: 13.5% (34th) • Rhode Island: 12.7% (30th) • Vermont: 10.9% (22nd)
  7. 7. Jared Walczak Policy Analyst jmw@taxfoundation.org CT: 42 ME: 9 MA: 37 NH: 34 RI: 30 VT: 22 • Many states offer significant R&D incentives which limit or even eliminate corporate income tax liability • Benefits sourcing can also be highly advantageous for R&D firms • With income taxes likely to be low, property taxes typically represent the largest share of an R&D firm’s liability by a substantial margin
  8. 8. Jared Walczak Policy Analyst jmw@taxfoundation.org • Connecticut: 20.9% (44th) • Maine: 16.6% (34th) • Massachusetts: 20.9% (44th) • New Hampshire: 15.8% (27th) • Rhode Island: 22.1% (47th) • Vermont: 16.4% (32nd)
  9. 9. Jared Walczak Policy Analyst jmw@taxfoundation.org CT: 44 ME: 34 MA: 44 NH: 27 RI: 47 VT: 32 • Retail is rarely the beneficiary of incentives, so low CIT rates are uniquely important drivers of overall liability • Property tax burdens tend to far outstrip sales tax liability; note that our study does not include sales taxes imposed on the stores’ own merchandise • Retail stands out as having lower effective tax rates for mature than new operations
  10. 10. Jared Walczak Policy Analyst jmw@taxfoundation.org • Connecticut: 8.0% (14th) • Maine: 17.6% (48th) • Massachusetts: 13.9% (37th) • New Hampshire: 12.6% (33rd) • Rhode Island: 14.5% (39th) • Vermont: 17.2% (47th)
  11. 11. Jared Walczak Policy Analyst jmw@taxfoundation.org CT: 44 ME: 35 MA: 37 NH: 13 RI: 39 VT: 21 • Favorable apportionment factors and the absence of a throwback rule can be more important than statutory top CIT rates • Property and sales tax burdens often substantial, UI burdens relatively modest • New firms frequently benefit from generous incentives, which can increase costs for mature operations
  12. 12. Jared Walczak Policy Analyst jmw@taxfoundation.org • Connecticut: 6.7% (12th) • Maine: 13.4% (44th) • Massachusetts: 13.5% (45th) • New Hampshire: 12.1% (38th) • Rhode Island: 14.9% (50th) • Vermont: 12.8% (41st)
  13. 13. Jared Walczak Policy Analyst jmw@taxfoundation.org CT: 12 ME: 44 MA: 45 NH: 38 RI: 50 VT: 41 • Property taxes are less important to labor- intensive manufacturing operations than they are to capital-intensive ones, but states limiting property taxes to land and buildings are still the most attractive • UI taxes can take on somewhat greater significance, but corporate income taxes are generally the driver of tax burdens
  14. 14. Jared Walczak Policy Analyst jmw@taxfoundation.org • Connecticut: 26.9% (46th) • Maine: 14.8% (9th) • Massachusetts: 28.0% (48th) • New Hampshire: 24.2% (40th) • Rhode Island: 30.7% (49th) • Vermont: 20.3% (29th)
  15. 15. Jared Walczak Policy Analyst jmw@taxfoundation.org CT: 46 ME: 9 MA: 48 NH: 40 RI: 49 VT: 29 • UI taxes play an outsized role because call centers are low-wage and labor-intensive • The impact of CITs is heavily dependent upon sourcing rules (benefits vs. IPA) • Job creation tax credits are often a highly significant consideration for new firms, and sometimes for mature firms as well
  16. 16. Jared Walczak Policy Analyst jmw@taxfoundation.org • Connecticut: 32.3% (36th) • Maine: 22.9% (18th) • Massachusetts: 41.1% (47th) • New Hampshire: 32.4% (37th) • Rhode Island: 41.8% (48th) • Vermont: 32.7% (38th)
  17. 17. Jared Walczak Policy Analyst jmw@taxfoundation.org CT: 36 ME: 18 MA: 47 NH: 37 RI: 48 VT: 38 • Property taxes are frequently responsible for more than two-thirds of firms’ overall tax burdens • States which impose property taxes on equipment, inventory, or both fare particularly poorly • States often seek to alleviate these burdens through targeted abatements
  18. 18. Jared Walczak Policy Analyst jmw@taxfoundation.org CH: 44 RD: 42 RT: 44 MC: 14 ML: 12 CC: 46 DC: 36 • Including a 20% surtax, Connecticut’s top CIT rate is 9%, while the 6-bracket PIT has a top rate of 6.7% • The PIT contains a recapture provision • Connecticut imposes the highest capital stock tax in the country (0.37%, $1M max) • A budget with a surtax extension, a move to combined reporting, and various miscellaneous new taxes led GE and Aetna to threaten to leave the state
  19. 19. Jared Walczak Policy Analyst jmw@taxfoundation.org CH: 44 RD: 42 RT: 44 MC: 14 ML: 12 CC: 46 DC: 36 • State imposes an above-average tax burden on all non-manufacturing operations, driven by high CIT • Manufacturing and service firms benefit from single sales factor apportionment • Connecticut foregoes a throwback rule • Property tax base includes equipment
  20. 20. Jared Walczak Policy Analyst jmw@taxfoundation.org CH: 35 RD: 9 RT: 34 MC: 48 ML: 44 CC: 9 DC: 18 • Maine’s 8.93% CIT and 7.95% PIT are both significantly above-average nationwide, though the state has a fairly modest 5.5% sales tax with no local option • This year, the Governor proposed, but the legislature ultimately rejected, broadening the sales tax base to include many services • Legislature had to override the Governor’s veto to enact a budget
  21. 21. Jared Walczak Policy Analyst jmw@taxfoundation.org CH: 35 RD: 9 RT: 34 MC: 48 ML: 44 CC: 9 DC: 18 • The state’s high CIT is ameliorated for some firms by benefit sourcing and single sales factor apportionment • But the state does impose a throwout rule • Applies the property tax to equipment • New firms benefit from 10% credit on investment up to $3.5M over 7 years
  22. 22. Jared Walczak Policy Analyst jmw@taxfoundation.org CH: 37 RD: 37 RT: 44 MC: 37 ML: 45 CC: 48 DC: 47 • Massachusetts’ modest PIT currently stands at 5.15%, with a trigger kicking in to reduce the rate slightly this year • The state’s CIT, however, stands at 8.0%, and property taxes are unusually high • Massachusetts also has high and poorly structured unemployment insurance taxes
  23. 23. Jared Walczak Policy Analyst jmw@taxfoundation.org CH: 37 RD: 37 RT: 44 MC: 37 ML: 45 CC: 48 DC: 47 • The state employs double-weighted sales factor apportionment for all but manufacturers, which receive SSF • Massachusetts relies on IPA sourcing and imposes a throwback rule • The state’s already high property tax rates extend to equipment • Incentives do little to alleviate burdens
  24. 24. Jared Walczak Policy Analyst jmw@taxfoundation.org CH: 13 RD: 34 RT: 27 MC: 33 ML: 38 CC: 40 DC: 37 • Imposes a CIT (business profits tax) at 8.5% and a VAT-style tax (business enterprise tax) at 0.75% • Foregoes a sales tax and only imposes individual income taxes on interest and dividend income • For 2016, BPT goes to 8.2%, BET 0.72% • Triggers could reduce BPT to 7.9% and BEP to 0.675% by the end of 2018
  25. 25. Jared Walczak Policy Analyst jmw@taxfoundation.org CH: 13 RD: 34 RT: 27 MC: 33 ML: 38 CC: 40 DC: 37 • State uses double-weighted sales factor apportionment with a throwback rule • IPA sourcing rules for service provision • Relatively high tax burdens for most businesses due to few individual taxes • Property taxes, though a major source of collections, are limited to real property
  26. 26. Jared Walczak Policy Analyst jmw@taxfoundation.org CH: 39 RD: 30 RT: 47 MC: 39 ML: 50 CC: 49 DC: 48 • Rhode Island’s corporate income tax declined from 9% to 7% in FY 2015 (after the book’s snapshot date) • The state also finished phasing out its antiquated capital stock tax • Rhode Island’s 7% sales tax is the highest rate among the New England states • FY 2016 budget includes generous job credits, new development credits, &c.
  27. 27. Jared Walczak Policy Analyst jmw@taxfoundation.org CH: 39 RD: 30 RT: 47 MC: 39 ML: 50 CC: 49 DC: 48 • The state uses three-factor apportionment except for manufacturing firms, which can use optional double-weighted sales factor • Rhode Island also adopts a throwback rule and sources all service income in-state • The state imposes some of the highest property taxes in the nation on our model firms, though new firms benefit from generous property tax abatements and investment tax credits
  28. 28. Jared Walczak Policy Analyst jmw@taxfoundation.org CH: 21 RD: 22 RT: 32 MC: 47 ML: 41 CC: 29 DC: 38 • Like most of its peers in New England, Vermont levies high top CIT (8.5%) and PIT (8.95%) rates; both taxes are graduated • The state’s 6.0% sales tax is augmented by very modest local sales taxes (0.14% avg.) • Vermont’s PIT brackets, standard deduction, and personal exemption are indexed for inflation
  29. 29. Jared Walczak Policy Analyst jmw@taxfoundation.org CH: 21 RD: 22 RT: 32 MC: 47 ML: 41 CC: 29 DC: 38 • Vermont uses double-weighted sales factor apportionment and IPA sourcing, and imposes a throwback rule • The property tax base includes land, buildings, and equipment, but the tax on buildings and equipment is wholly abated for a firm’s first five years of operation • State offers generous incentives to new firms—including, atypically, to retail
  30. 30. Jared Walczak Policy Analyst jmw@taxfoundation.org • Region characterized by high rates, often offset by substantial incentives which pick winners and losers— chance for a state to stand out with neutral tax code • Equipment often included in the property tax base, substantially increasing tax costs for many firms • Uncompetitive tax codes leaning heavily on legacy businesses and existing industry mixes; can these states adapt as economy evolves? • Businesses care about more than just taxes, but tax rates & structures are important to business decisions
  31. 31. Jared Walczak Policy Analyst jmw@taxfoundation.org

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