Real-World State Tax Burdens Revealed in Landmark Study

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Location, location, location. It’s the mantra repeated by those buying and selling real estate. But a new tax study from the Tax Foundation and accounting firm KPMG shows how much location can impact American businesses, too.

The report, titled “Location Matters,” was supported by a grant from the John Templeton Foundation and demonstrates that state and local taxes can affect U.S.-based corporations’ decisions on where to locate facilities, headquarters, and offices. These geographical investments are often influenced by an assessment of the relative tax burdens across different states.

It can also be very difficult for business executives to find a clear answer to the bottom line question: how much will our company pay in taxes? The reason is that previous comparative studies of tax burdens have been limited and have tended to simplify the impact different administrations have on real business operations. The heart of the new report is, therefore, an “apples-to-apples” comparison of corporate tax costs in all 50 states. It plugs the information gap by examining the actual tax burden of seven model firms designed by Tax Foundation economists. KPMG modeling experts then made the calculations.

“’Location Matters’ goes beyond the standard approach of looking at statutory tax rates and tries to calculate just how much businesses really are paying in each state across all the different major tax categories,” explains Jared Walczak, a policy analyst at the Tax Foundation. “Our study is unique in looking at what firms actually pay and answering that fundamental question, what are my tax costs as a business owner?”

Another important element of the study is that each firm is modeled twice: once as a new business eligible for tax incentives, and once as a mature business that is no longer eligible. “All tax structures involve trade-offs,” continues Walczak. “Incentives have to be paid for in some way, which tends to mean that mature firms tend to experience a much more significant tax burden. This can disadvantage firms that have longer time horizons or make a longer-term commitment to a given state.” The issue highlights a key message from the report: state legislatures need to focus on their overall tax systems and not just temporary incentives if they want to attract and keep businesses.

The study accounts for all business taxes: corporate income taxes, property taxes, sales taxes, unemployment insurance taxes, capital stock taxes, inventory taxes, and gross receipts taxes. This is significant because different states load taxes in different ways upon businesses. For example, Pennsylvania’s tax burden is relatively low on factories, especially in heavy industry, but relatively high for corporate headquarters. Alternatively, retail stores—and new operations in particular—have many business expenses generally subject to sales tax, and thus do well in a state without a sales tax.

The study’s seven model firms are designed to address areas of business activity that citizens and states care about, since they boost local employment and are, therefore, often covered in the news. The firms include a corporate headquarters, a retail store, a distribution center, a call center, an R&D facility, a capital intensive manufacturer, and a labor intensive manufacturer. “What you get in ‘Location Matters’ is a very deep dive into a lot data that effects corporate location decisions,” adds Scott Drenkard, economist and manager of state projects. The comparisons will also help identify policy improvements, and assist the media in reporting on tax competitiveness.

The report is already proving of great interest to business leaders and policy makers. General Electric (GE), for example, has been considering a move after another round of tax hikes hit its home state of Connecticut in June. While its neighboring state of New York may try to entice GE with relocation incentives, the study found that New York actually has the country’s highest effective tax rate on corporate headquarters. As an editorial in The Wall Street Journal cleverly noted, “As far as we know Frank Sinatra never sang about New York business taxes. But if you can afford to make it there, you can afford to make it anywhere.”