The Tax Foundation, an independent tax policy nonprofit, released its comparison of corporate tax costs in all 50 states, demonstrating the real-world tax burden and truth facing all businesses–tax are not transparent. Now in its third edition, the study is used as a guide for forming and operating under evolving tax policies.
According to the Tax Foundation, Location Matters accounts for the tax complexity and the ways that tax structure affects competitiveness, as a tool for policymakers to explore the impact of tax provisions. The report of the real-world tax burden businesses operate under, now in its third edition, includes calculations of the real-world tax burden businesses operate under.
- Statutory tax rates only tell part of the story. While topline rates are important and high rates may provide “sticker shock” for corporations considering locating within a given state, they are just one component of effective tax burdens. Tax incentives, apportionment, throwback rules, and other factors can have a dramatic impact on effective tax burdens. In some cases, states with low statutory tax rates can impose high effective tax burdens, and vice versa.
- Corporate income taxes are just one part of the corporate tax burden. Corporate income taxes only account for more than one-fifth the average corporate tax burden for five of the 16 new and mature iterations of the eight firm models. Sales, property, and unemployment insurance taxes are highly significant components of a firm’s overall tax burden as well.
- Incentives disproportionately benefit new firms, often to the detriment of established operations. Because most tax incentives are developed to convince firms to relocate to, or increase hiring in, a given state, they disproportionately benefit new firms, often to the detriment of mature firms which experience higher tax burdens to subsidize these incentives. Businesses with longer time horizons may have cause to be wary of states which too substantially prioritize attracting new industries over maintaining modest rates for established operations.
- Incentive-heavy tax structures can undermine tax equity even among newly-established firms. While incentives overwhelmingly favor new firms over mature operations, they often discriminate among firm types as well, with the sort of incentives that favor one operation but do little or nothing to help another. As such, they tend to pick winners and losers and, while potentially making the state highly attractive to specific industries or firm profiles, can limit the state’s broader economic appeal across diversified business types.
- Different firm types experience dramatically different effective tax rates. Both because different firm types will vary in their exposure to major state and local taxes—distribution centers will be more sensitive to property taxes burdens, for instance, while retail establishments may be more significantly impacted by the sales tax—and because of differential treatment of different firm types under the tax code, businesses can experience dramatically different effective tax rates. The median effective tax rate for new shared service centers (which rarely receive tax incentives) is 26.1 percent, while the median rate for highly favored new R&D centers is 12.0 percent. The median rate for a mature labor-intensive manufacturing firm is 10.3 percent; the median mature distribution center, by contrast, experiences a 34.6 percent tax burden.
- The impact of corporate income and gross receipts taxes depends heavily on structure and firm type. Although gross receipts taxes generally have much lower statutory rates than traditional corporate income taxes, they are assessed on firms’ total receipts (sometimes less certain subtractions), not just net income. Some firm types benefit from this structure, while others are penalized by it. The relative impact of these two approaches to business taxation for any given firm type can also depend heavily on how nexus or, in the case of corporate income taxes, apportionment is treated.
The Location Matters study, together with the Tax Foundation’s annual State Business Tax Climate Index, provides tools to understand each state’s business tax system and the burdens it imposes, offering a road map for improvement.
Source: Location Matters 2021, Tax Foundation