The Best and the Worst States for Business Taxes

Mar. 2nd, 2012
Karen Kroll

Corporate finance folks who are debating where to locate a new plant or call center will be interested in the latest report from the Tax Foundation. Entitled “Location Matters: A Comparative Analysis of State Tax Costs on Business,” the report is an exhaustive look at all the various taxes that would come into play in different states (even different cities within the states) and for different types of operations — say, a new corporate headquarters versus a mature manufacturing operation. While it’s not news that tax codes contain provisions that favor one industry over another, the extent of the differences can be surprising, and show how looking just at an overall tax rate can be misleading. The top states overall — that is, those with the lowest tax burden — for mature firms are: Wyoming, South Dakota, Georgia, Nevada and Ohio. For new firms, the winners are Nebraska, Louisiana, Ohio, Wisconsin and Oklahoma. At the bottom of the list when it comes to the tax burden on mature firms: Rhode Island, Kansas, West Virginia, Hawaii and Pennsylvania. For new firms, it’s Maryland, Colorado, Kansas, Pennsylvania and Hawaii. The study breaks this out even further, showing the total effective tax rates for mature corporate headquarters, mature R&D operations and a mature retail store. Wyoming, for instance, has the lowest rate for both corporate headquarters (8.3 percent) and retail stores (7.3 percent), while its effective tax rate for an R&D facility comes in third, at 6.7 percent. Pennsylvania, on the other hand, comes in dead last on all three counts, with a 28 percent rate on corporate headquarters, 29.1 percent on R&D operations, and 31.2 percent on retail stores. Nebraska, which has the overall lowest rate for new firms, is a much more mixed bag. Its rate for a new headquarters is the lowest of the 50 states, at 1.4 percent, while its rate for research operations, at -5 percent, is second lowest (Louisiana’s rate is -10.5 percent). However, its tax burden on new retail stores, at 35.3 percent, puts it at 32nd among the other states. In fact, Nebraska is one of several states that seem to roll out the welcome mat for new corporate offices and R&D, but not retail. The total effective tax rate in Wisconsin for new corporate offices is 7.8 percent, or third among the states, while the rate on new R&D is 3.9 percent, putting it fourth. New retail stores, however, can expect a rate of 38.2 percent, or 40th among all states. The report provides a great deal of information that CFOs, CEOs and heads of real estate will want to consider as they decide where to locate operations. Innovation by Geography At the same time, taxes aren’t the only factor that determine the health of a state’s business climate. A 2010 study by the Ewing Marion Kauffman Foundation and the Information Technology and Innovation Foundation identified what it called states “at the forefront of the nation’s movement toward a global, innovation-based new economy,” and those that are lagging, according to a release. The distinction is based on “the extent to which state economies are knowledge-based, globalized, entrepreneurial, IT-driven and innovation-based.” Consider the top states according to this ranking: Massachusetts, Washington, Maryland, New Jersey and Connecticut. The highest that any of these states achieved when it came to tax policies is Maryland, which ranked eighth for its overall tax burden on mature firms. The bottom states in the Kauffman report were Mississippi, West Virginia, Arkansas, Alabama and Wyoming. When looking at taxes, the effective rates in these states varies widely, according to the Tax Foundation report. Wyoming is generally low-tax, while Mississippi comes in 37th for mature firms and 21st for newer firms.

KarenĀ  Kroll
Corporate Finance & Tax
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