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A Comprehensive Analysis of State Tax Costs on Businesses

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Location matters

  1. 1. Location MattersA Comparative Analysis ofS t a t e Ta x C o s t s o n B u s i n e s s Tax Foundation in collaboration with
  2. 2. Location Matters A Comparative Analysis of S t a t e Ta x C o s t s o n B u s i n e s s Ta x Fo u n d a t i o n , i n c o l l a b o r a t i o n w i t h K PM G L L P Tax Foundation529 14th St., NW • National Press Building • Washington, DC 20045 | (202) 464-6200 www.TaxFoundation.org | TF@ TaxFoundation.org © 2012 Tax Foundation. All rights reserved.
  3. 3. Table of Contents Introduction........................................................................................................v Study Overview and Key Findings.................................................................................................... vi Overall Results......................................................................................................................................... ix Results for Mature Tier 1 Firms............................................................................................................ x Results for Mature Tier 2 Firms........................................................................................................... xi Results for New Tier 1 Firms............................................................................................................... xii Results for New Tier 2 Firms.............................................................................................................. xiii Chapter 1: Objectives and Scope................................................................... 1 Study Objectives...................................................................................................................................... 1 Study Scope............................................................................................................................................... 3 Locations..................................................................................................................................................... 3 Firm Types................................................................................................................................................... 3 Locations .................................................................................................................................................... 4 Tax Scope.................................................................................................................................................... 6 Other Tax Factors..................................................................................................................................... 7 Caveats and Limitations......................................................................................................................11 Chapter 2: The Composite Results: The Lowest and Highest Tax Cost States..................................................... 13 States with Lowest Tax Cost States for Mature Firms................................................................15 States with Highest Tax Costs for Mature Firms..........................................................................16 States with Lowest Tax Costs for New Firms................................................................................18 States with Highest Tax Costs for New Firms...............................................................................19 Chapter 3: Industry Specific Results: The Lowest and Highest Tax Cost States..................................................... 23 Corporate Headquarters.....................................................................................................................25 Research and Development Facility...............................................................................................31 Retail Store...............................................................................................................................................37 Call Center................................................................................................................................................42 Distribution Center...............................................................................................................................48 Capital-Intensive Manufacturing Operation................................................................................54 Labor-intensive Manufacturing Business.....................................................................................60 Chapter 4: State-Specific Details.................................................................. 67 Chapter 5: Methodology..............................................................................171 iii
  4. 4. iv
  5. 5. IntroductionA Comparative Analysis ofState Tax Costs on BusinessState and local taxes represent a significant However, these studies can give the incor-business cost for corporations operating in rect impression that all businesses in a statethe United States; in fact, they often have a enjoy such incentives. They also do notmaterial impact on net operating margins. typically account for increased tax rates forConsequently, business location decisions mature businesses that may be required tofor new manufacturing facilities, corporate support such incentives.headquarter relocations, and the like often Some studies, including the Tax Founda-are influenced by assessments of relative tion’s widely cited annual State Business Taxtax burdens across multiple states. Climate Index, define model tax structure Widespread interest in corporate tax principles and measure the state’s tax codeburdens has led to a number of stud- relative to that model. The State Business Taxies from a variety of think tanks, media Climate Index is a useful tool for lawmak-organizations, and research groups. None ers to understand how neutral and efficientof these studies, however, provide compari- their state’s tax system is compared tosons of actual state business tax burdens. other states and to identify areas where their system can be improved. However, Some studies compare total tax collections this does not address the bottom lineor business tax collections per capita or as a question asked by many business execu-percent of total tax revenue. The shortcom- tives: “How much will our company paying of this approach is that collections are in taxes?”not burdens: many business taxes are col-lected in one state but paid by companies Individual firms considering expansionin other states. Comparing state collections frequently calculate their tax bill in variousthus does not accurately portray the rela- states, but these calculations are not oftentive tax burden that real-world businesses released publicly and are usually confinedwould incur in each state. to a small number of states. Some studies assess the relative value of To fill the void left by these studies,tax incentives available for different types the Tax Foundation, in collaboration withof businesses, such as new job tax cred- KPMG LLP, the U.S. audit, tax and advi-its, new investment tax credits, sales tax sory firm, set out to develop and publishexemptions, and property tax abatements. a landmark, apples-to-apples comparisonIntroduction v
  6. 6. of corporate tax costs in the 50 states. Tax •• National, state, and local media organi-Foundation economists designed seven zations can more effectively report onmodel firms, and KPMG modeling experts the tax competitiveness of the 50 states.calculated each firm’s tax bill in each The Location Matters study, togetherstate. The study accounts for all business with our annual State Business Tax Cli-taxes: corporate income taxes, property mate Index, will provide the tools to fullytaxes, sales taxes, understand eachunemployment state’s businessinsurance taxes, Throughout the study, a ranking of first tax system, thecapital stock taxes, indicates the lowest tax burden while burdens it imposes,inventory taxes, 50th indicates the highest tax burden. and a roadmap forand gross receipts improving it.taxes. Addition-ally, each firmwas modeled twice in each state: once as Study Overview and Keya new firm eligible for tax incentives, and Findingsonce as a mature firm not eligible for such The study is comprised of four chaptersincentives. and an appendix. Chapter 1 outlines the objectives and scope of the study. The Tax Foundation economists then used chapter describes the seven model firmsthe raw model results to perform the ensu- that were analyzed, the specific taxes thating industry and state comparisons. were included in the study, the locations The result is a comprehensive calcula- that were chosen in each state, and thetion of real-world tax burdens that we other factors that could influence thedesigned as a valuable resource for a variety results.of stakeholders: Chapter 2 presents two measures of a•• Governors, legislators, and state officials state’s overall business tax competitiveness, can better understand and address their first for mature firms and then for newly competitive position with other states. established firms. Each state is ranked based upon a composite score that is an•• CEOs, CFOs, and corporate America average of the state’s scores across the seven can better evaluate the relative com- different firm types. petitiveness of states in which they operate or states they are considering for As Table 1 indicates, for mature firms, investment. Wyoming ranks first overall with the low- est average tax burden across the seven•• Businesses and trade organizations can firm types, while Pennsylvania ranks 50th better identify policy improvements for overall with the highest average tax burden each state. across the seven firm types.•• Site-selection experts can screen states For newly established firms, Nebraska more accurately and quickly for consid- ranks first overall with the lowest average eration by their clients. tax burden across the seven model firmsvi Introduction
  7. 7. while Hawaii ranks 50th with the highest •• Labor-Intensive Manufacturing:average tax burden across the seven firms. Mature: Wyoming ranked first, Hawaii ranked 50th. Chapter 3 focuses on each of the seven New: Louisiana ranked first, Hawaiifirm types and compares the tax burden in ranked 50th.each state for both mature and new firms.These results are summarized in Tables2 through 5. The first- and 50th-ranked Chapter 4 summarizes the results forstates for each firm type are as follows: each state. The chapter is aimed at legisla- tors and reporters who need the basic facts•• Corporate Headquarters: on the state’s business tax system and brief Mature: Wyoming ranked first, Pennsyl- talking points on why the state scored as it vania ranked 50th. did for the key firm types. New: Nebraska ranked first, Pennsylva- nia ranked 50th. The Appendix provides more detail on the study’s methodology and assumptions.•• R&D Facility: It is intended for the serious researcher Mature: Louisiana ranked first, Pennsyl- who wants to understand how the model- vania ranked 50th. ing was done and where to find the source New: Louisiana ranked first, Pennsylva- data for the tax information. nia ranked 50th. The Tax Foundation is indebted to•• Retail Store: Hartley Powell, Ulrich Schmidt and Ann Mature: Wyoming ranked first, Pennsyl- Holley at KPMG for all of their expertise, vania ranked 50th. research, and guidance on this project. New: South Dakota ranked first, Iowa Also, this project would not have been ranked 50th. possible without the tremendous support•• Call Center: of Glenn Mair of MMK Consulting. Mature: South Dakota ranked first, Tax Foundation contributors include: New Jersey ranked 50th. Scott Drenkard, Alicia Hansen, Joseph New: Nebraska ranked first, West Vir- Henchman, Scott Hodge, Nick Kasprak, ginia ranked 50th. Laura Lieberman, David Logan, Will•• Distribution Center: McBride, and Kail Padgitt. The Tax Foun- Mature: Wyoming ranked first, Iowa dation is responsible for all of the analysis ranked 50th. and data presented in this report and, of New: Ohio ranked first, Kansas ranked course, any errors. 50th.•• Capital-Intensive Manufacturing: Mature: Wyoming ranked first, Hawaii ranked 50th. New: Louisiana ranked first, Maryland ranked 50th.Introduction vii
  8. 8. About the Tax Foundation About KPMG LLPFounded in 1937, the Tax Foundation is KPMG LLP, the audit, tax and advisorya nonpartisan, 501 (c )(3) not-for-profit firm (www.kpmg.com/us), is the U.S.organization dedicated to providing member firm of KPMG Internationaltaxpayers and lawmakers reliable data Cooperative (“KPMG International”). and sound analysis on public finances KPMG International’s member firms haveat the federal, state, and local levels of 138,000 professionals, including moregovernment. than 7,900 partners, in 150 countries.viii Introduction
  9. 9. Table 1 Overall Results Mature Firms New Firms Index Score Rank Index Score Rank Alabama 86.0 13 86.4 19 Alaska 97.7 23 81.1 17 Arizona 86.2 14 114.9 31 Arkansas 102.8 30 69.6 8 California 105.8 34 133.8 45 Colorado 105.4 33 135.1 47 Connecticut 93.9 21 109.3 30 Delaware 98.1 24 80.5 16 Florida 90.6 19 122.8 36 Georgia 71.8 3 66.7 6 Hawaii 142.6 49 151.4 50 Idaho 111.7 38 116.0 32 Illinois 126.4 45 94.2 24 Indiana 122.7 43 80.1 15 Iowa 116.5 40 126.8 41 Kansas 133.5 47 141.6 48 Kentucky 88.4 18 69.4 7 Louisiana 84.1 10 52.8 2 Maine 100.4 27 87.3 20 Maryland 82.4 8 134.7 46 Massachusetts 123.6 44 128.2 43 Michigan 98.8 25 96.6 25 Minnesota 112.7 39 119.6 35 Mississippi 109.2 37 89.3 21 Missouri 108.8 36 97.0 26 Montana 93.1 20 93.8 23 Nebraska 82.5 9 31.7 1 Nevada 77.7 4 124.8 38 New Hampshire 99.7 26 91.0 22 New Jersey 121.1 41 104.9 27 New Mexico 97.4 22 80.0 14 New York 121.1 42 124.4 37 North Carolina 80.8 7 79.9 13 North Dakota 87.0 15 83.5 18 Ohio 78.1 5 58.7 3 Oklahoma 87.1 16 65.3 5 Oregon 100.5 28 106.3 28 Pennsylvania 145.1 50 145.9 49 Rhode Island 129.1 46 128.4 44 South Carolina 103.8 32 119.4 34 South Dakota 56.0 2 77.7 11 Tennessee 101.3 29 108.7 29 Texas 85.9 12 127.7 42 Utah 80.2 6 76.7 10 Vermont 103.7 31 79.2 12 Virginia 84.4 11 125.9 39 Washington 87.2 17 126.3 40 West Virginia 140.2 48 118.5 33 Wisconsin 107.7 35 59.8 4 Wyoming 48.3 1 73.3 9A Comparative Analysis of State Tax Costs on Business ix
  10. 10. Table 2Results for Mature Tier 1 Firms Mature Corporate Mature R&D Mature Retail Headquarters Facility Store Total Total Total Effective Effective Effective Tax Rate Tax Rate Tax RateState (TETR) Rank (TETR) Rank (TETR) RankAlabama 14.9% 22 15.5% 41 14.3% 13Alaska 11.5% 4 15.7% 42 14.9% 17Arizona 15.0% 25 10.3% 13 16.9% 30Arkansas 14.0% 18 13.6% 30 14.8% 15California 17.2% 38 9.5% 11 17.2% 31Colorado 14.3% 20 14.7% 36 15.4% 19Connecticut 17.8% 42 12.0% 21 17.6% 32Delaware 14.0% 17 16.5% 44 21.4% 45Florida 13.5% 15 13.0% 25 15.9% 24Georgia 14.0% 19 8.6% 10 14.8% 15Hawaii 14.3% 21 13.9% 32 20.9% 43Idaho 16.4% 34 15.2% 39 18.1% 35Illinois 19.9% 43 19.0% 48 19.9% 40Indiana 15.7% 28 7.3% 5 15.4% 19Iowa 23.8% 48 13.5% 28 25.9% 49Kansas 16.2% 30 18.7% 46 19.6% 38Kentucky 13.0% 12 14.3% 35 15.0% 17Louisiana 15.4% 26 1.7% 1 15.4% 19Maine 15.9% 29 8.4% 9 16.4% 26Maryland 13.3% 14 8.0% 7 15.4% 19Massachusetts 16.2% 31 14.1% 33 20.3% 41Michigan 20.3% 44 12.7% 23 20.9% 43Minnesota 22.4% 47 10.4% 14 24.9% 47Mississippi 16.3% 32 15.5% 41 16.3% 25Missouri 16.4% 36 18.8% 47 19.6% 38Montana 9.6% 3 13.7% 31 13.9% 10Nebraska 16.3% 33 6.3% 2 16.6% 27Nevada 12.2% 8 11.2% 17 10.3% 3New Hampshire 11.9% 6 13.1% 27 15.6% 23New Jersey 17.6% 41 14.9% 37 18.6% 36New Mexico 15.0% 23 11.3% 18 13.4% 8New York 25.0% 49 24.0% 49 24.9% 47North Carolina 13.5% 16 11.8% 20 14.1% 12North Dakota 11.8% 5 7.7% 6 13.6% 9Ohio 12.2% 7 10.1% 12 12.1% 4Oklahoma 12.8% 10 11.7% 19 14.6% 14Oregon 16.8% 37 12.3% 22 16.6% 27Pennsylvania 28.0% 50 29.1% 50 31.2% 50Rhode Island 17.6% 41 14.1% 33 22.7% 46South Carolina 15.7% 27 14.9% 37 17.6% 32South Dakota 8.6% 2 7.3% 4 8.1% 2Tennessee 16.4% 35 15.8% 43 16.6% 27Texas 13.3% 13 12.8% 24 14.0% 10Utah 12.9% 11 8.0% 7 12.8% 6Vermont 15.0% 24 13.0% 25 17.7% 34Virginia 12.3% 9 13.5% 28 13.3% 7Washington 22.3% 46 10.4% 14 12.1% 4West Virginia 20.8% 45 17.5% 45 20.7% 42Wisconsin 17.2% 38 10.7% 16 19.2% 37Wyoming 8.3% 1 6.7% 3 7.3% 1District of Columbia 16.1% 18.5% 19.3% x A Comparative Analysis of State Tax Costs on Business
  11. 11. Table 3Results for Mature Tier 2 Firms Mature Mature Mature Mature Call Distribution Capital-Intensive Labor-Intensive Center Center Manufacturing Manufacturing Total Total Total Total Effective Effective Effective Effective Tax Rate Tax Rate Tax Rate Tax RateState (TETR) Rank (TETR) Rank (TETR) Rank (TETR) RankAlabama 14.5% 5 18.6% 2 10.4% 18 10.5% 25Alaska 23.5% 34 26.8% 18 12.5% 25 12.0% 30Arizona 17.9% 16 27.7% 21 9.5% 14 8.9% 13Arkansas 20.8% 26 24.6% 14 17.3% 43 14.2% 40California 20.4% 25 25.3% 15 18.1% 44 15.5% 43Colorado 20.8% 26 35.6% 38 15.5% 39 12.2% 31Connecticut 24.5% 38 30.7% 29 8.1% 9 7.6% 6Delaware 21.1% 28 26.5% 17 9.5% 13 9.5% 19Florida 16.0% 8 27.9% 22 12.9% 27 9.8% 20Georgia 12.5% 2 25.9% 16 7.5% 8 6.5% 2Hawaii 23.8% 36 21.9% 7 26.2% 50 33.1% 50Idaho 26.1% 41 28.1% 23 15.2% 37 13.5% 37Illinois 26.1% 41 35.4% 37 15.0% 36 15.8% 45Indiana 26.6% 44 46.6% 48 23.2% 48 17.4% 48Iowa 23.7% 35 50.1% 50 5.5% 4 10.0% 22Kansas 26.4% 43 44.1% 43 20.3% 47 16.4% 47Kentucky 17.4% 13 23.2% 13 12.4% 24 9.3% 17Louisiana 21.4% 29 36.6% 40 10.9% 20 9.1% 16Maine 14.9% 6 30.7% 28 18.2% 45 14.6% 41Maryland 16.6% 11 29.6% 27 13.0% 30 7.0% 3Massachusetts 28.3% 46 44.2% 44 15.3% 38 15.6% 44Michigan 16.4% 9 37.8% 42 9.2% 12 7.7% 7Minnesota 27.9% 45 45.9% 46 6.2% 7 10.0% 23Mississippi 17.5% 14 28.3% 24 19.4% 46 13.4% 36Missouri 22.3% 31 31.9% 33 12.7% 26 10.0% 21Montana 23.1% 33 27.5% 20 14.5% 32 10.3% 24Nebraska 20.1% 24 31.0% 31 8.5% 10 7.4% 5Nevada 22.8% 32 20.9% 4 8.5% 11 8.6% 11New Hampshire 24.6% 39 31.0% 31 12.9% 29 12.6% 33New Jersey 33.1% 50 46.5% 47 10.6% 19 13.7% 38New Mexico 19.7% 22 23.1% 12 15.6% 40 14.9% 42New York 24.0% 37 37.5% 41 5.3% 3 8.9% 14North Carolina 16.5% 10 20.6% 3 9.8% 15 9.4% 18North Dakota 19.7% 23 29.3% 26 12.2% 23 12.6% 34Ohio 18.0% 17 33.3% 35 6.2% 6 8.9% 12Oklahoma 15.0% 7 22.2% 8 13.4% 31 11.8% 28Oregon 25.0% 40 21.6% 6 14.8% 34 11.2% 27Pennsylvania 30.2% 48 48.0% 49 6.1% 5 9.1% 15Rhode Island 30.5% 49 45.3% 45 14.7% 33 16.2% 46South Carolina 21.6% 30 35.6% 39 14.9% 35 8.2% 9South Dakota 12.2% 1 22.4% 9 4.9% 2 7.3% 4Tennessee 19.5% 21 27.5% 19 12.0% 22 12.4% 32Texas 17.4% 12 30.9% 30 9.9% 17 8.5% 10Utah 18.0% 18 22.7% 11 11.5% 21 10.6% 26Vermont 18.4% 20 28.8% 25 16.4% 41 13.3% 35Virginia 17.9% 15 22.6% 10 12.9% 28 7.9% 8Washington 14.1% 4 21.0% 5 9.8% 16 11.9% 29West Virginia 28.5% 47 34.2% 36 23.9% 49 17.9% 49Wisconsin 18.3% 19 32.5% 34 16.8% 42 14.2% 39Wyoming 13.7% 3 13.5% 1 4.6% 1 5.2% 1A Comparative Analysis of State Tax Costs on Business xi
  12. 12. Table 4Results for New Tier 1 Firms New Corporate New R&D New Retail Headquarters Facility Store Total Total Total Effective Effective Effective Tax Rate Tax Rate Tax RateState (TETR) Rank (TETR) Rank (TETR) RankAlabama 16.0% 24 16.9% 29 31.4% 23Alaska 12.7% 15 17.3% 31 20.6% 4Arizona 17.4% 31 18.9% 36 36.1% 37Arkansas 8.9% 5 6.7% 6 30.5% 20California 21.8% 45 16.4% 27 31.6% 25Colorado 18.3% 34 20.7% 40 35.6% 34Connecticut 20.0% 40 18.3% 35 34.1% 29Delaware 13.3% 18 19.5% 37 31.3% 23Florida 17.4% 32 19.6% 38 35.5% 34Georgia 15.2% 23 7.5% 8 31.0% 21Hawaii 16.3% 26 16.0% 26 32.2% 26Idaho 20.4% 43 20.9% 41 33.5% 27Illinois 16.0% 25 16.9% 29 34.9% 31Indiana 11.9% 12 5.4% 5 19.4% 2Iowa 27.0% 47 21.5% 45 49.7% 50Kansas 20.2% 42 25.4% 49 42.7% 45Kentucky 9.7% 6 9.6% 9 28.4% 16Louisiana 7.0% 2 -10.5% 1 35.2% 32Maine 17.1% 28 10.6% 12 25.1% 9Maryland 17.7% 33 10.8% 13 33.5% 27Massachusetts 19.8% 39 21.2% 42 41.9% 43Michigan 19.3% 36 14.4% 21 42.2% 44Minnesota 26.0% 46 15.3% 23 40.9% 42Mississippi 13.8% 20 12.6% 18 36.7% 38Missouri 12.4% 14 16.5% 28 43.4% 46Montana 11.5% 10 14.4% 22 25.4% 10Nebraska 1.4% 1 -5.0% 2 35.3% 32Nevada 17.1% 30 18.2% 34 26.3% 11New Hampshire 12.9% 16 14.2% 19 21.0% 5New Jersey 16.4% 27 14.2% 19 29.9% 17New Mexico 12.0% 13 2.3% 3 22.5% 6New York 28.3% 48 25.0% 48 37.7% 39North Carolina 9.9% 7 15.4% 24 27.8% 15North Dakota 14.2% 21 11.6% 16 22.5% 6Ohio 11.5% 9 9.9% 10 23.9% 8Oklahoma 8.0% 4 7.3% 7 31.1% 21Oregon 19.5% 38 15.7% 25 27.5% 14Pennsylvania 30.7% 50 33.5% 50 45.5% 47Rhode Island 19.3% 37 23.9% 47 45.4% 47South Carolina 15.0% 22 17.7% 33 46.0% 49South Dakota 11.1% 8 10.9% 14 17.4% 1Tennessee 20.0% 41 21.3% 44 34.4% 30Texas 19.1% 35 21.3% 43 35.6% 34Utah 13.2% 17 10.0% 11 26.6% 12Vermont 13.6% 19 10.9% 14 27.2% 13Virginia 17.1% 28 20.4% 39 30.2% 19Washington 29.2% 49 17.6% 32 29.9% 17West Virginia 21.5% 44 21.6% 46 39.7% 41Wisconsin 7.8% 3 3.9% 4 38.2% 40Wyoming 11.8% 11 11.6% 16 19.4% 2District of Columbia 22.3% 26.6% 40.1% xii A Comparative Analysis of State Tax Costs on Business
  13. 13. Table 5Results for New Tier 2 Firms New New New New Call Distribution Capital-Intensive Labor-Intensive Center Center Manufacturing Manufacturing Total Total Total Total Effective Effective Effective Effective Tax Rate Tax Rate Tax Rate Tax RateState (TETR) Rank (TETR) Rank (TETR) Rank (TETR) RankAlabama 18.7% 12 25.5% 10 8.2% 18 9.1% 13Alaska 28.1% 28 20.2% 2 5.5% 5 10.6% 19Arizona 23.5% 20 38.6% 33 16.3% 40 13.2% 39Arkansas 11.4% 6 30.3% 21 9.6% 29 9.1% 14California 28.6% 30 34.5% 26 23.9% 47 20.3% 49Colorado 29.9% 34 46.6% 40 21.8% 45 16.7% 47Connecticut 32.1% 37 40.2% 34 9.6% 25 10.3% 18Delaware 21.9% 17 22.9% 7 4.4% 4 7.4% 8Florida 26.1% 23 43.6% 35 20.1% 44 12.7% 34Georgia 7.2% 5 22.3% 4 8.5% 20 7.1% 7Hawaii 29.5% 32 25.5% 10 24.6% 48 40.6% 50Idaho 34.8% 43 37.2% 32 9.6% 27 13.4% 40Illinois 27.7% 27 25.2% 9 7.0% 13 11.2% 23Indiana 21.7% 16 32.2% 23 13.8% 38 11.0% 20Iowa 33.7% 39 48.6% 41 5.6% 7 12.1% 30Kansas 38.9% 47 65.4% 50 13.6% 37 12.5% 33Kentucky 3.4% 4 25.9% 12 13.3% 35 8.3% 11Louisiana 34.6% 42 50.0% 43 1.0% 1 0.4% 1Maine 19.2% 13 36.2% 31 8.3% 19 12.5% 32Maryland 28.1% 28 46.1% 39 31.9% 50 16.1% 46Massachusetts 38.5% 46 60.2% 49 7.9% 17 13.1% 37Michigan 13.4% 8 49.8% 42 9.5% 24 6.4% 4Minnesota 39.1% 49 50.3% 44 5.6% 6 12.0% 29Mississippi 12.6% 7 22.8% 6 15.2% 39 11.1% 22Missouri 33.9% 41 27.3% 16 9.8% 30 6.9% 5Montana 30.1% 35 27.1% 14 13.4% 36 11.3% 24Nebraska 1.1% 1 30.7% 22 2.4% 2 3.3% 2Nevada 35.2% 44 34.4% 25 21.9% 46 15.8% 45New Hampshire 29.7% 33 36.1% 30 7.7% 16 12.8% 36New Jersey 33.5% 38 56.9% 47 5.9% 8 11.8% 28New Mexico 24.6% 22 29.0% 19 13.0% 34 12.8% 35New York 32.0% 36 45.5% 38 6.3% 10 11.8% 26North Carolina 23.4% 19 25.9% 12 8.8% 21 7.5% 9North Dakota 26.1% 23 27.2% 15 7.1% 15 12.4% 31Ohio 16.8% 10 18.3% 1 3.3% 3 6.2% 3Oklahoma 2.7% 3 29.8% 20 9.6% 27 9.9% 15Oregon 33.7% 39 28.7% 18 11.3% 33 14.0% 42Pennsylvania 36.3% 45 59.5% 48 6.1% 9 11.8% 26Rhode Island 39.0% 48 54.6% 46 6.6% 12 13.2% 38South Carolina 23.3% 18 53.7% 45 19.6% 43 7.9% 10South Dakota 18.2% 11 32.3% 24 10.5% 31 11.0% 21Tennessee 26.8% 26 28.0% 17 9.6% 26 13.7% 41Texas 28.9% 31 45.0% 37 18.3% 42 14.2% 43Utah 20.4% 14 21.1% 3 8.9% 22 10.3% 16Vermont 13.8% 9 24.2% 8 10.7% 32 11.3% 25Virginia 26.6% 25 35.8% 28 24.8% 49 14.2% 44Washington 23.8% 21 34.7% 27 16.7% 41 18.1% 48West Virginia 40.5% 50 43.7% 36 6.4% 11 10.3% 16Wisconsin 1.7% 2 35.9% 29 7.0% 14 6.9% 6Wyoming 21.4% 15 22.4% 5 9.2% 23 8.5% 12A Comparative Analysis of State Tax Costs on Business xiii
  14. 14. xiv Introduction
  15. 15. Chapter 1Objectives and ScopeStudy Objectives The impact of incentives: The studyThe overarching objective of the Tax Foun- makes an important contribution todation/KPMG state tax cost model project our understanding of tax neutralitywas to develop an objective bottom-line by measuring how much each state’smeasure of the tax cost of each of the 50 generally available incentive pro-U.S. states for a select number of model grams affect the tax burden on newcorporations. One of the more unique investments. This measure allows usresults of this study is a measure of the to do two things: (1) calculate antotal tax burden borne by both mature effective tax rate for new investmentsfirms and new investments, which allows in each state, then rank the states’us to understand the effects of state tax effective tax rates for each firm type;incentives compared to a state’s core tax and, (2) compare the effective taxsystem. rates for mature firms against the effective tax rates for new invest- The study presents four different but ments to test the neutrality of eachequally important ways of looking at the state’s tax system to new and existingtax competitiveness of each state: businesses. The tax burden (i.e. total effective While many state officials view tax tax rates): The study answers the incentives as a necessary tool in question most frequently asked by their state’s ability to be competi- business owners and corporate execu- tive, others are beginning to question tives: “How much am I going to pay the cost-benefit of incentives and in total state and local taxes in each whether they are fair to mature firms state?” The model calculates the total that are paying full freight. Indeed, state and local tax burden for each there is growing animosity among firm type in every state and com- many business owners and execu- pares it to the firm’s pre-tax profits to tives to the generous tax incentives determine the effective tax rate. Here enjoyed by some of their direct the total effective tax rate (TETR) competitors. includes corporate net income taxes, capital taxes, unemployment taxes, As will be seen in chapters 2 and sales taxes, property taxes, gross 3, some states rank well for both receipts taxes, and other general busi- mature and new firms, while others ness taxes. rank poorly for both. On the otherObjectives and Scope 1
  16. 16. hand, some states will rank well by larger than the national average, one measure but poorly in the other while a number lower than 100 – say, because of the complex interaction of 80 – means the state’s effective rate the myriad tax variables. is 20 percent lower than the national average. A summary measure of which states have the lowest average tax costs Creating an index score for each and which have the highest average of the firm types helps control for tax costs: At the end of the day, law- the differences in firm size and makers and taxpayers want to know nature, creating an apples-to-apples how their state ranks on average comparison. compared to other states. In other The index scores for the seven firm words, how well does a state rank types are then averaged to create a across a variety of firm types relative summary score for each state. The to other states? states are then re-ranked from top to Chapter 2 actually produces two bottom, with 1 being the state with measures of a state’s overall business the lowest overall tax cost, while 50 tax competitiveness. The first is of is the state with the highest overall the tax burden faced by “mature” tax cost. firms, those that have been estab- A measure of tax burdens faced by lished for more than 10 years. This different industries and firms: In could be referred to as a state’s basic, addition to measuring the different or core, competitiveness. The second tax burdens faced by existing and measure is for the tax burden faced new firms, another way of looking at by newly established operations, the neutrality of a state’s tax system those that have been in operation less is to measure the effective tax rates than three years. This represents a faced by firms in different indus- state’s competitiveness after we have tries. In an ideal world, the tax code taken into account the various tax should not favor one industry or firm incentive programs it makes available type over another. to new investments. As a practical matter, of course, this To determine an overall ranking, the is very difficult because firms in model first ranks the states from low- different industries have very differ- est to highest in terms of the effective ent cost structures, income streams, tax rates paid by each of the seven and profitability. However, compar- different firm types for both mature ing the effective tax rates faced by and new firms. We then turn the different firm types can give us an effective tax rate into an index score indication of how a tax system favors by dividing it by the national average one industry over another or how within that firm type. Since 100 is neutral the system is to firms of all considered the average, a number types. greater than 100 – say, 120 – means the state’s effective rate is 20 percent2 Objectives and Scope
  17. 17. Chapter 3 looks at which states business taxes, sales taxes, property are most competitive for the seven taxes, and unemployment insurance different types of mature firms and taxes which are most competitive for the seven different types of new firms. Locations The results show that even among The study recognizes that different the most or least competitive states, industries have different location needs. there are wide variations in the tax Corporate offices, for example, tend to be burdens faced by the seven different located in the largest metropolitan areas firm types. with access to airports and financial cen- Chapter 4 summarizes the results for ters. By contrast, manufacturing facilities each state across all the firm types, tend to be located in or near smaller com- for both mature and newly estab- munities with lower land costs. lished firms. Thus, the study divides the locations The Appendix contains the meth- into two tiers: Tier 1 is a major city in the odology and assumptions used to state while Tier 2 is a mid-size city in the perform the calculations. state, generally with a population of less than 500,000. We then locate the corpo- rate headquarters, R&D center, and retailStudy Scope outlet in a Tier 1 city within each state.This study represents one of the most The call center, distribution center, andextensive comparisons of state corporate manufacturing facilities are all located intax burdens ever undertaken. The scope of a Tier 2 city. The methodology chapterthe study includes: discusses the tax characteristics of these•• All 50 U.S. states, including 99 differ- locations in greater detail. ent cities: 50 major urban locations and 49 smaller metropolitan regions. (Due Firm Types to its small size, for Rhode Island all The study includes seven firm types that analysis relates to the Providence metro represent a broad cross section of indus- area.) tries that are highly sought by states•• Seven different model firm types rep- competing for jobs and investment dollars. resenting a range of sectors – corporate These firms are all corporate entities, not headquarters, research and develop- S-corporations, LLCs, or partnerships ment center, retail store, call center, that may be taxed under state individual distribution center, capital-intensive income tax systems. We recognize that manufacturing, and labor-intensive flow-through businesses are an impor- manufacturing tant part of the business landscape but in order to keep the study as manageable as•• Both mature firms and new investment possible, we have limited the analysis to•• The most variable business tax costs in corporate entities. each state: corporate income taxes, gross receipts taxes, capital and other generalObjectives and Scope 3
  18. 18. Table 6Locations State Tier 1 Tier 2 Alabama Birmingham Montgomery Alaska Anchorage Fairbanks Arizona Phoenix Prescott Arkansas Little Rock Fort Smith California Los Angeles Merced Colorado Denver Fort Collins Connecticut Hartford Norwich Delaware Wilmington Dover Florida Miami Gainesville Georgia Atlanta Macon Hawaii Honolulu Hilo Idaho Boise Coeur D’Alene Illinois Chicago Springfield Indiana Indianapolis Elkhart Iowa Des Moines Cedar Rapids Kansas Wichita Topeka Kentucky Louisville Lexington Louisiana New Orleans Shreveport Maine Portland Bangor Maryland Baltimore Salisbury Massachusetts Boston Worcester Michigan Detroit Saginaw Minnesota Minneapolis Rochester Mississippi Jackson Gulfport Missouri St. Louis Joplin Montana Billings Missoula Nebraska Omaha Lincoln Nevada Las Vegas Reno New Hampshire Manchester Concord New Jersey Newark Trenton New Mexico Albuquerque Santa Fe New York New York Utica North Carolina Raleigh Wilmington North Dakota Fargo Grand Forks Ohio Cincinnati Canton Oklahoma Oklahoma City Lawton Oregon Portland Salem Pennsylvania Philadelphia Reading Rhode Island* Providence Providence South Carolina Columbia Spartanburg South Dakota Sioux Falls Rapid City Tennessee Nashville Clarksville Texas Dallas Lubbock Utah Salt Lake St. George Vermont Burlington Rutland Virginia Richmond Roanoke Washington Seattle Spokane West Virginia Charleston Parkersburg Wisconsin Milwaukee Eau Claire Wyoming Cheyenne Casper District of Columbia Washington n/a*Due to Rhode Island’s small size, all analysis relates to the Providence metro area.4 Objectives and Scope
  19. 19. These seven firm types include1: million with earnings before tax of 12 percent.•• A corporate headquarters or regional managing office: This regional corpo- •• A capital-intensive manufacturer rate office has 200 high-wage employees such as a steel company: The com- including management, financial pany has initial capital investment operations, IT, sales, and administrative of $300 million and 200 employees, employees. It has revenue of approxi- including management, administrative, mately $31 million with earnings before installation, maintenance, produc- tax of 14 percent. tion, transportation, and materials. The average revenue is assumed to be•• A scientific research and develop- approximately $200 million with earn- ment facility: This pharmaceutical ings before tax of 10 percent. research and development facility has 50 employees, including management, •• A labor-intensive manufacturer such business and financial, computer and as a bus or truck manufacturer: This math, science, and office/administrative firm has 300 employees, the majority positions. It has revenue of $8 million of whom work in management, instal- with earnings before tax of 14 percent. lation, maintenance, production, and assembly, and initial capital investment•• An independent clothing store: This of $65 million. The average revenue free-standing store in a big city shop- is assumed to be approximately $173 ping district has 25 employees, most of million with earnings before tax of 7 whom work in sales, and sales of $2.9 percent. million with earnings before tax of 9 percent. These firm types are also very mobile, which means the owners and investors•• An independent telemarketing or have considerable flexibility in where to call center: This low-wage service locate them based on factors ranging from business has 600 employees including taxes to labor force. This makes them management, sales, and administra- frequent targets for economic development tive employees. It has revenue of $29 subsidies and tax incentives. million with earnings before tax of 7 percent. For each of these firm types, the study assesses the tax costs borne by a mature•• A distribution warehouse: This inde- firm – one that is at least 10 years old – pendent third-party logistics provider versus those borne by a new facility, one for a large company has a 350,000 that is less than three years old. Mature square foot warehouse with 95 employ- firms are typically no longer eligible for ees in transportation and material any tax incentive programs while the handling, administrative, and manage- new facility would be eligible for most ment positions. It has revenue of $13 incentives. Each of these firms except the retail1 Greater detail on the financial characteristics of outlet are assumed to have out-of-state these firm types will be found in Chapter 3 and in the methodology Appendix. customers or clients. Thus, how each stateObjectives and Scope 5
  20. 20. apportions a firm’s income is a critical gross receipts tax in addition to thefactor in determining a state’s effective tax corporate income tax, while Virginia’srate for that industry. gross receipts tax is levied at the local level. New Hampshire has an alterna-Tax Scope tive minimum tax in addition to theTypes of Taxes Included2 corporate income tax; a firm must pay the greater of the income tax or theBusinesses collect and remit all kinds of business enterprise tax which is a varianttaxes, from employee payroll taxes and of an addition-method value-added taxproperty taxes to excise taxes and income (VAT). Gross receipts taxes do have thetaxes. But the scope of this study is limited advantage of a low rate on a broad baseto taxes that directly impact a business’s but also lead to increased complexitycosts, not taxes that a business collects only and economic distortions, such as firmsto pass through to government. These are in loss-making situations still beingalso the taxes that vary most across loca- faced with a state corporate tax liability.tions. They include: •• Property taxes: Property taxes are espe-•• Corporate net income taxes: Forty- cially important to businesses because four states levy a tax on the net income commercial property is frequently of corporations while Nevada, South taxed at a higher rate than residential Dakota, and Wyoming do not have a property. Additionally, localities and corporate income tax or other busi- states often levy taxes on the personal ness-level tax, and Ohio, Texas, and property or equipment owned by a Washington levy a gross receipts tax business. Since property taxes can be a (or margin tax in Texas) rather than a large burden to business, they can have corporate income tax. Of the states with a significant effect on location decisions. a corporate income tax, 30 levy a single, flat rate on all corporate income. The •• Unemployment insurance (UI) taxes: remaining 14 states have graduated, or UI taxes are paid by employers into the multi-bracket, rate structures. Gener- UI program to finance benefits to work- ally speaking, a low “sticker price” of ers recently unemployed. UI tax rates a state’s top corporate income tax rate in each state are based on a schedule can often be a signal of how attractive ranging from a minimum rate to a a state is to business investment while a maximum rate. The schedule for any high rate can deter investment. particular business is determined by the business’s experience rating or history•• Gross receipts and franchise taxes: of claims. The rate is then applied to Ohio, Texas, and Washington do not a taxable wage base (a predetermined have a corporate income tax but do portion of an employee’s wages) to have a business tax that is levied on determine UI tax liability. Competitive the gross receipts of the firm or, in the states tend to have rate structures with case of Texas, on the gross margins of lower minimum and maximum rates the business. Delaware has a state-level and a wage base at the federal level.2 For more detail on the types of taxes included in this study, see the methodology appendix.6 Objectives and Scope
  21. 21. •• Sales taxes on business equipment or and, thus, make a state with no sales tax on inputs: In addition to levying sales taxes equipment a far more attractive location. on consumer goods, many states extend The Tax Foundation’s annual State- their sales taxes to business equipment, Local Tax Burdens report does attempt to machinery, and inputs. These taxes can account for the shifting of business tax add considerably to the cost of new burdens by allocating these costs to cus- investment and the final price of prod- tomers, workers, and shareholders based ucts as the sales tax cascades through on various demographic and geographic the supply chain--what economists call factors. By contrast, this study, Location “tax pyramiding.” Highly competitive Matters, measures only the legal incidence states tend to tax fewer business inputs, of these direct business taxes. The effec- which greatly reduces the cost of doing tive tax rates calculated in this study are business in the state – especially for based on the firm’s pre-tax income and the capital- or equipment-intensive firms. total amount of tax that impacts the firm’s direct costs.Who Bears the Burden of the Tax?For the purposes of this study it is assumed Other Tax Factorsthat the business bears the entire burdenof the tax, which is why the owners are Nexus and Apportionmentso sensitive to the costs and why states Nexus is the legal term for whether acompete to offer tax incentives. Econo- state has the power to tax a business. Themists, however, typically look at business historical rule that remains mostly intaxes in terms of who bears the actual force is that a state only has power to taxeconomic burden of the tax, not just the a business if the business has property orlegal burden. That is because corporations employees in the state, a concept known asare simply legal entities, not people per “physical presence.”3 Some states, however,se. In economic terms, the real burden (or have adopted aggressive nexus standards inincidence) of business taxes is borne by recent years seeking to expand state taxingcustomers through higher prices, work- power to businesses operating in otherers through lower wages, or owners and states.shareholders through lower returns on Firms with nexus in more than onetheir investment. state must use state rules to apportion their In this study, taxes are considered a profits, determining how much of theircost of doing business, not just a factor income each state may tax. Historically,to be passed on to consumers or shared profits were apportioned among states inwith workers. A good example is the sales the ratio of the company’s property andtax on business equipment which, theo- payroll in each state. For example, if 50retically, could be absorbed into the price percent of a firm’s payroll was based inof the product. However, this tax can 3 Ending the Nexus Guessing Game for Taxpay-substantially increase the cost of building a ers: Lamtec Corp. v. Washington Department ofmulti-million dollar manufacturing facility Revenue, by Joseph Henchman, Dirk Gisebert and Laura Lieberman, June 16, 2011. http://www. taxfoundation.org/news/show/27381.htmlObjectives and Scope 7
  22. 22. Colorado and 50 percent of a firm’s prop- approximately 1 percent of the firm’s prof-erty was in Colorado, Colorado would be its if it used a single-sales factor formula.able to tax 50 percent of the firm’s profits Since many businesses make sales intoif it used this formula. Long the histori- states where they do not have nexus, busi-cal standard, this property-and- payroll nesses can end up with “nowhere income,”formula was unsuccessfully recommended income that is not taxed by any state. Toby Congress’s Willis Commission to be the counter this phenomenon, many statesuniform national standard in 1959. have adopted what are called “throwback” States resisted this recommendation and or “throwout” rules to identify and taxinstead as a whole adopted the Uniform profits earned in other states but not taxedDivision of Income for Tax Purposes by those states.(UDITPA), also known as the “three- Under “throwback,” such profits arefactor formula.” This formula apportions taxed by the state where the sale origi-profits based on each state’s share of the nated. Under “throwout,” such profits arefirm’s overall property, payroll, and sales ignored in calculating the state’s share of(each of the three “factors” is averaged total profits, by subtracting them from theequally). For example, if 50 percent of a apportionment denominator. For exam-firm’s payroll was based in Colorado and ple, if Colorado has a single-sales factor50 percent of the firm’s property was in formula and a throwback rule, a firm withColorado, but only 1 percent of the firm’s only 1 percent of its sales in Colorado andsales were in Colorado, Colorado would 75 percent of its sales in State Y, where itbe able to tax approximately 34 percent is not subject to an income tax, would seeof the firm’s profits if it used a three-factor those sales “thrown back” to Colorado.formula. Colorado would thus be able to tax 76 per- Over the past few years, many states cent of the firm’s profits.have increased the weight of the sales Our study’s model firms (with thefactor with some relying on it completely. exception of the corporate office) eachThis change has had the effect of reduc- have all their property and payroll locateding tax burdens for businesses that have in one state, while sales in each state are inmost of their property and payroll in the ratio of each state’s relative economicthe state but only a small proportion of activity. In addition, we assume that eachtheir national sales in the state, while model firm has the right to apportion itsincreasing tax burdens for out-of-state income. While this may be a simplifiedcompanies that have minimal property approach for multistate firms, it still per-or payroll in the state but a large propor- mits more detailed and accurate analysistion of their national sales in the state. For than any previous study. However, readersexample, if 50 percent of a firm’s payroll should be cautioned that our assumptionswas based in Colorado and 50 percent of can lead to extreme results that may bethe firm’s property was in Colorado, but uncommon in the real world: for example,only 1 percent of the firm’s sales were in firms in states with a single-sales factor andColorado, Colorado would be able to tax no throwback face an extremely low tax burden.8 Objectives and Scope
  23. 23. Incentives: What Is Forty-five states offer job creation taxIncluded and How Do They credits of some type; 26 states’ credits wereAffect Certain Firms? considered applicable to one or more of the model firms in this study.Many states provide tax credits or taxincentives with the goal of attracting new Investment Tax Credits: Investment taxinvestment or encouraging large out-of- credits offer an offset against tax liabilitystate firms to relocate to their state. These if the company invests in new property,credits vary widely in size and scope. Some plants, equipment, or machinery in theare aimed a incentivizing the hiring of state offering the credit. Sometimes, thenew workers while others are meant to new investment will have to be “quali-offset the investment costs of new plant fied” and approved by the state’s economicand equipment. While tax incentives may development office.reduce these costs for some taxpayers, they As one example, Indiana offers a 10can be a windfall to a firm that would have percent tax credit for eligible capital invest-expanded anyway, can leave out existing ment. Each of this study’s model firms isfirms, and can complicate the tax system. eligible for that incentive. In most states, however, investment incentives are not asThe major tax incentives that are broadly available, often being targeted atmeasured in this study include: manufacturing investment. Forty statesNew Job Tax Credits: These credits offer offer investment tax credits of some type;specific dollar amounts for each new job 28 states’ credits were considered appli-a company creates over a specified period cable to one or more of the model firms inof time. To receive the credit, the job this study.must generally be considered “qualified” Research and Development (R&D)by state officials and only be available to Tax Credits: R&D tax credits reducecertain types of industries. Job tax credits the tax burden of companies that investcould encourage some firms to hire new in “qualified” research and developmentemployees even if they would be better off activities. The theoretical argument forspending more on new equipment. R&D tax credits is that they encourage As one example, Pennsylvania offers a basic research that may be good for societyJob Creation Tax Credit of $1,000 per net in the long run but not necessarily profit-new job to approved businesses that cre- able in the short run. Opponents argueate jobs within three years. To be eligible, that much of the R&D work supportedbusinesses must demonstrate to state by the credit would have occurred anyway,officials “[l]eadership in the application, and that state-level R&D credits are lessdevelopment, or deployment of leading effective because benefits of successfultechnologies in business operations.”4 R&D are not limited to just that state. As one example, Arizona offers a 24 per-4 Pennsylvania Department of Community & cent tax credit for in-state R&D expenses. Economic Development, Job Creation Tax Credit Program Guidelines (Jan. 2009), http://www. Thirty-nine states offer investment tax newpa.com/sites/default/files/uploads/jobcre- credits of some type; thirty-seven states’ ationtaxcredit_guidelines_09.pdf.Objectives and Scope 9
  24. 24. credits were considered applicable to one manufacturing and shipping facilities foror more of the model firms in this study. 10 years. Property tax abatements in 39 states were considered applicable to one or Payroll Withholding Tax Rebates: more of the model firms in this study.These rebates return to a company a por-tion of state income taxes withheld from Other: Other discretionary taxemployees’ wages for new hires. These incentives such as financing programs,rebates must generally be pre-approved by zone-based benefits (such as enterprisestate officials and are usually measured by zones and economic development zones),job creation over a period of years. These “deal-closing funds,” and others are notrebate programs are often difficult to included in this analysis. Assumptionsadminister efficiently, creating a compli- were made to compute benefits if incentiveance burden to the taxpayer. programs had discretionary components, such as a sliding scale of benefits based on As one example, New Jersey rebates project parameters.to companies up to 80 percent of newemployees’ state income tax withholdings,if the company creates at least 25 new jobs Other Factors Affecting New Firmswithin a two-year period and demonstrates Differently from Mature Firmsto state officials that the job expansion is While the availability of targeted taxeconomically viable and would not have incentives to new firms is a major reasonoccurred without the rebate. Nineteen some new firms in many states pay lowerstates’ payroll withholding tax rebates were tax bills than otherwise equivalent matureconsidered applicable to one or more of firms, two other factors we identified canthe model firms in this study. produce significant differences. Property Tax Abatements: State and Sales Taxes on Equipment. Tax econo-local abatements reduce property tax mists agree that a properly designed salesliability for certain types of industries or in tax should only tax final retail sales andcertain areas by applying credits to the tax exempt so-called “business-to-business”that would otherwise be due. While some transactions. When firms must pay salesabatements are broadly available, many tax on their purchases of raw materials,are awarded to certain projects as eco- machinery, and other inputs, these taxesnomic development packages designed to become part of the price of the final prod-increase investment or attract new employ- uct sold to consumers. Different productsers. Critics argue that abatements merely will then have different hidden taxes onshift the location of investment and jobs taxes, a concept known as “pyramiding”rather than inducing new investment and and a source of economic distortion.new jobs. Abatements can also strain local Most states have sought to minimizeresources by growing the level of services this distortion by specifically exemptingwhile keeping new facilities off the prop- some (but not all) new manufacturingerty tax rolls. machinery and equipment from their sales As one example, Nebraska will waive tax. In these states, our study shows new100 percent of property taxes for new firms purchasing equipment face lower10 Objectives and Scope
  25. 25. sales tax obligations than in states without mobile – meaning, they can be locatedsuch a sales tax exemption. in almost any state – and, therefore, they are highly sought after by all 50 states. Depreciation and Property Taxes on So while the summary score may not beMachinery and Inventory. While virtu- representative of all industries, it doesally all local governments and many states represent a good sample of competitivelevy property taxes on a company’s land firm types.and building improvements, 39 states alsoimpose property Business taxtax on the value burdens don’tof a company’s It is important to note that the rank- necessarily reflectmachinery, and ings for each state are not necessarily a the quality of11 states impose reflection of the quality or efficiency of a state tax systems.property tax on the state’s tax system. The rankings are only Indeed, the studyvalue of a com- a measure of how much or how little a frequently showspany’s inventory. state taxes different firms or industries that different statesThese taxes espe- relative to the national average. can impose thecially impact large same tax burdensmanufacturing on the same firmoperations, retail type but achievestores, and other businesses with large that result in very different ways. Foramounts of machinery or merchandise. example, according to the Tax Founda- tion/KMPG state tax cost model, Arkansas Unlike land, buildings and machin- and Colorado each have a 20.8 percentery lose their value over time. This asset effective tax rate for a mature call centerdepreciation results in many mature firms operation. However, Arkansas achievesin our study paying less in property taxes this result with a 6.5 percent corporatethan new firms. tax rate while Colorado’s corporate rate is 4.63 percent. Arkansas’ combined state-Caveats and Limitations local general sales tax rate is 9.25 percentInformation limitations. The study while Colorado’s is 7.55 percent. However,was based on the applicable tax law and Colorado’s property tax burden for thisavailable data as of April 1, 2011. We type of firm is more than twice as much asunderstand that a number of states have the burden it would face in Arkansas.tax changes that are being phased in over anumber of years, but because those future Similarly, the tax systems in Nebraskachanges can be revoked at any time, they and Ohio produce nearly identical effectivehave not been considered in this study. tax rates for new labor-intensive manufac- turing operations: Nebraska’s is 6.0 percent Model firm limitations. This study while Ohio’s is 6.1 percent. However,measures the tax burden faced by only despite having a 7.81 percent corporate taxseven model corporations and, thus, rate, Nebraska reduces its overall businessdoesn’t represent the universe of industries tax burden through the use of generousthat states compete for. However, the seven property tax credits, investment credits,firms included in this report are highlyObjectives and Scope 11
  26. 26. and job tax credits. Ohio also offers a high corporate tax rate and a single-salesgenerous property tax credit, but instead of factor – such as Iowa, which has a 12levying a corporate income tax, Ohio has a percent corporate rate – can score wellbroad-based 0.26 percent gross receipts tax because only a fraction of the firm’s total(known as the Commercial Activities Tax) sales will be allocated to the home statewhich reduces the income tax burden for based on each state’s share of the nationalan export-oriented firm. population. This study makes no judgments on Under different assumptions, thathow a state reaches its ranking, even if the same state may not score as favorably. Forstate’s tax measures may cause distortions, example, if we compare the tax burdensunintended economic consequences, or of firms that have no out-of-state sales, ashigh compliance costs for firms. These is the case in our model retail operation,sorts of issues are addressed by the Tax the apportionment factor is not an issueFoundation’s State Business Tax Climate because all of the income is taxed at theIndex and the State Tax Burden rankings. in-state rate. Thus, assuming that prop- erty and sales taxes are equal factors in the Assumptions matter. Like any study apportionment formula, the in-state firmof this magnitude, the assumptions can facing Iowa’s 12 percent corporate tax rateinfluence the results. For example, in order almost certainly ends up having a higherto keep the study as tractable as possible, tax burden than a similar firm in neighbor-we assumed that our model firms (with ing Missouri, which has a 6.25 percentthe exception of the retail establishment) corporate tax rate.do business in all 50 states, but only havesignificant (or material) nexus – employ- District of Columbia. Because theees, property, and facilities – in their home District of Columbia is a highly densestate. In other words, they make some- urban city, the model only measured thething in their home state and ship it to tax burden for Tier 1 firms: a corporatethird parties in all other states. However, it headquarters, an R&D center, and a retailis also assumed that the businesses have a outlet. These TETRs are shown in thenominal nexus in one or more other states, tables but DC is not ranked with the otherthus qualifying them as interstate corpora- states.tions eligible to apportion their incomebetween states. This highly simplified assumptionprobably does not reflect the opera-tions of most multistate businesses. Mostmultistate firms have sales personnel orsubsidiaries in other states to market anddistribute their products. This assumptiongreatly advantages states that have single-sales factor apportionment over those thathave traditional three-factor formulas.Thus, it is possible that a state with a very12 Objectives and Scope
  27. 27. Chapter 2The Composite Results: The Lowestand Highest Tax Cost StatesThis chapter provides lawmakers and average. For example, if a state’s total taxeconomic development officials a broad burden for a corporate headquarters ismeasure of their state’s business tax burden $3.5 million, but the national average isacross the seven model firm types. While $3 million, then the state will get a modelbusiness leaders will likely focus on the score of 116. Since the average is fixed atspecific firm rankings in Chapter 3, this 100, a score of 116 means the state’s taxbroader ranking of “most” and “least” burden is 16 percent above the average.competitive states is critical to the abil- Similarly, if the state’s tax burden is $2.5ity of state officials to promote their state million, then its model score will be 83,while enacting policies that improve their which means its tax burden is 17 percentstate’s broader business climate. below the average. This study actually produces two Averaging the individual scores for themeasures of a state’s overall business tax seven firm types controls for differencescompetitiveness. The first is of the tax in the size and nature of each firm type,burden faced by “mature” firms, those which then allows us to compare them onthat have been established for more than an apples-to-apples basis.10 years. This could be referred to as a After these scores are averaged, we thenstate’s basic, or core, competitiveness. The re-rank the states from the lowest averagesecond measure is for the tax burden faced score – or lowest tax cost – to the highestby newly established operations, those average score – or highest tax cost.that have been in operation less than threeyears. This represents a state’s competitive- One of the more interesting aspects ofness after we have taken into account the this study is the difference between howvarious tax incentive programs it makes a state ranks for mature firms and howavailable to new investments. it ranks for new operations after we take the incentive programs into account. As While Chapter 3 will compare the we will see, some states rank well in bothstates’ rankings for each firm type, in this measures while others will rank poorly inchapter we present a broader composite both. On the other hand, some states willmetric that averages each state’s model rank well by one measure but poorly in thescores across the seven firm types. A model other because of the complex interactionscore is a ratio that is calculated by com- of the myriad tax variables.paring a state’s tax burden to the nationalThe Composite Results: The Lowest and Highest Tax Cost States 13
  28. 28. Table 7Overall Results Mature Firms New Firms Index Score Rank Index Score RankAlabama 86.0 13 86.4 19Alaska 97.7 23 81.1 17Arizona 86.2 14 114.9 31Arkansas 102.8 30 69.6 8California 105.8 34 133.8 45Colorado 105.4 33 135.1 47Connecticut 93.9 21 109.3 30Delaware 98.1 24 80.5 16Florida 90.6 19 122.8 36Georgia 71.8 3 66.7 6Hawaii 142.6 49 151.4 50Idaho 111.7 38 116.0 32Illinois 126.4 45 94.2 24Indiana 122.7 43 80.1 15Iowa 116.5 40 126.8 41Kansas 133.5 47 141.6 48Kentucky 88.4 18 69.4 7Louisiana 84.1 10 52.8 2Maine 100.4 27 87.3 20Maryland 82.4 8 134.7 46Massachusetts 123.6 44 128.2 43Michigan 98.8 25 96.6 25Minnesota 112.7 39 119.6 35Mississippi 109.2 37 89.3 21Missouri 108.8 36 97.0 26Montana 93.1 20 93.8 23Nebraska 82.5 9 31.7 1Nevada 77.7 4 124.8 38New Hampshire 99.7 26 91.0 22New Jersey 121.1 41 104.9 27New Mexico 97.4 22 80.0 14New York 121.1 42 124.4 37North Carolina 80.8 7 79.9 13North Dakota 87.0 15 83.5 18Ohio 78.1 5 58.7 3Oklahoma 87.1 16 65.3 5Oregon 100.5 28 106.3 28Pennsylvania 145.1 50 145.9 49Rhode Island 129.1 46 128.4 44South Carolina 103.8 32 119.4 34South Dakota 56.0 2 77.7 11Tennessee 101.3 29 108.7 29Texas 85.9 12 127.7 42Utah 80.2 6 76.7 10Vermont 103.7 31 79.2 12Virginia 84.4 11 125.9 39Washington 87.2 17 126.3 40West Virginia 140.2 48 118.5 33Wisconsin 107.7 35 59.8 4Wyoming 48.3 1 73.3 914 The Composite Results: The Lowest and Highest Tax Cost States
  29. 29. Results: Top-Ranked States Looking at the remaining states that for Mature Operations round out the top ten, all of them have a top 10 score in at least one firm category10 States with Lowest Tax Cost States but balance that with a much lower scorefor Mature Firms in one or more other categories. Georgia Index Score RankWyoming 48.3 1 may be the exception to this rule in thatSouth Dakota 56.0 2 its best scores are second for call cen-Georgia 71.8 3 ters and labor-intensive manufacturing,Nevada 77.7 4Ohio 78.1 5 while its worst score is 19th for corporateUtah 80.2 6 headquarters. Ohio scores in the top 10North Carolina 80.8 7 in three categories but is pulled down byMaryland 82.4 8 a 35th-place score for distribution centers.Nebraska 82.5 9Louisiana 84.1 10 These mixed results are a reminder that the overall scores can be a guide, but each state Based on the average model scores should be viewed individually as to how itacross the seven different firm types, fares on each of the firm types.Wyoming stands out as having the lowestoverall tax cost for business of any state, Why do these states rank well overallfollowed closely by South Dakota. Wyo- for mature operations? The common traitming’s score is nearly 52 percent below the of Wyoming and South Dakota is thatnational aver- they both lack aage while South corporate incomeDakota’s is 44 Throughout the study, a ranking of first tax. Nevada,percent below the indicates the lowest tax burden while which ranks fourthaverage. 50th indicates the highest tax burden. overall, is the other state that The remaining does not levy aeight states in the corporate income tax. The benefits thattop 10 are Georgia, Nevada, Ohio, Utah, Nevada gets from not having a corporateNorth Carolina, Maryland, Nebraska, and income tax were diminished because of itsLouisiana. In contrast to Wyoming and high unemployment insurance taxes andSouth Dakota, the scores for these states high sales taxes on business inputs. Forare between 16 percent and 28 percent example, these two factors were the causebelow the national average. of Nevada’s 33rd-place score for call center Wyoming ranked first in five of the operations.seven firm types and third in the other two Ohio, which ranked fifth overall, alsocategories. South Dakota ranked first in does not have a formal corporate incomeone category (call centers), second in three tax. Instead, it imposes a gross receipts taxothers, and no worse than ninth in the called the Commercial Activity Tax (CAT).remaining categories. These were the only This low-rate, broad-base tax helped thetwo states to score in the top 10 within state score well for corporate headquarters,every firm category. retail operations, and for capital-intensive manufacturing.The Composite Results: The Lowest and Highest Tax Cost States 15

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