New Study Ranks States by Lowest and Highest Effective Tax Rates

Location-Matters-state-tax-burdensWidespread interest in state corporate tax burdens has resulted in a variety of studies that focus on business tax collections per capita, the value of tax incentives for different businesses, and the relative ranking of a state’s business tax code. None of these studies, however, provide business leaders or policymakers with a comparison of actual state tax burdens faced by real-world business.

The Tax Foundation has released a study in collaboration with KPMG LLP, the U.S. audit, tax and advisory firm, which fills this information gap. “Location Matters: A Comparative Analysis of State Tax Costs on Business” is an apples-to-apples comparison of actual state tax burdens faced by businesses. The study not only examines the different tax rates faced by different types of businesses, but also highlights how tax codes treat new and previously established firms within each state. Tax Foundation economists created seven model firms in different industries, and KPMG tax specialists calculated the tax bill for those firms in each state, both as new facilities and as mature firms (at least 10 years old).

The states with the lowest and highest effective tax rates on the different mature model firms according to the study are:

  • Call Center: California (11.4%) and New Jersey (35.4%)
  • Retail Store: Wyoming (6.6%) and New York (26.5%)
  • Distribution Center: Wyoming (12.9%) and New Jersey (48.2%)
  • Corporate Headquarters: Wyoming (6.9%) and New York (25.3%)
  • Labor Intensive Manufacturer: Wyoming (4.3%) and Rhode Island (14.9%)
  • Capital-Intensive Manufacturer: Iowa (3.9%) and Indiana (19.2%)
  • Research and Development Facility: Nebraska (-2.3%) and New York (24.8%)

The study’s key findings include:

  • States with low statutory tax rates can still impose high effective tax burdens due to factors such as tax incentives, apportionment, and throwback rules.
  • Corporate income taxes are just one part of a business’s tax burden. Sales, property, and unemployment insurance taxes can also impose significant burdens on businesses.
  • Tax incentives chiefly benefit new firms, often to the disadvantage of established operations.
  • Incentive-heavy tax systems can reduce tax equity even among newly-established firms.
  • Different firm types experience dramatically different effective tax rates.
  • The impact of corporate income and gross receipts taxes depends heavily on structure and firm type.

“Understanding a location’s unique tax landscape can help companies operate more efficiently and effectively in both their existing locations and in new ones they might be considering,” said Hartley Powell, principal in the Global Location and Expansion Services practice at KPMG LLP. “The Location Matters report is a comprehensive calculation of real-world tax obligations in all 50 states that can better inform companies’ overall location decisions.”

“Discussions of business taxes sometimes focus on topline rates while ignoring how those taxes may fall on different kinds of businesses,” said Tax Foundation analyst Jared Walczak. “Tax reform discussions often focus on lowering the tax burden on business in general. However, it’s also crucial to address the tax code’s treatment of new and mature businesses in different industries.”

Click here to download the full report: “Location Matters: A Comparative Analysis of State Tax Costs on Business”