Study: Location Matters in Business Taxes

Published May 9, 2012

Wyoming has the nation’s lowest business tax costs for established businesses and Pennsylvania the highest, according to a report by the Tax Foundation and KPMG LLP.

“Location Matters: A Comparative Analysis of State Tax Costs on Business” provides a guide for anyone making decisions about new manufacturing facilities, corporate headquarter relocations, or state government affairs. It’s also of interest to those who want to know whether their state’s tax policies encourage or discourage job growth. It highlights the sometimes surprising differences in how different kinds of businesses are taxed within the same state.

“This was the most extensive look at business tax costs across the 50 states that’s ever been attempted,” said Tax Foundation President Scott Hodge.

‘Dramatic Disparities’ in Taxes

“Corporate taxes on the state level rarely treat all comers equally, leading to sometimes dramatic disparities in the cost of doing business,” said Hodge. “Tax preferences and incentive deals can distort the playing field based on how long a business has been operating, whether it’s a manufacturing or retail operation, or whether it’s moved from another state to set up shop.”

Distortions caused by taxes can be seen in the differences between mature and newly arrived businesses. Some states that have low average business tax burdens for new firms have high burdens for established firms, as if luring them in only to hit them hard later.

“We’ve found there’s tremendous variability in taxes across the country,” Hodge said. “I kind of liken it to buying a car. Everybody who walks out of the showroom seems to have paid a different price, depending on who they are, when they bought, and what kind of incentives they got. I think that’s the biggest shocker from the entire study. There’s great variability not only across the country, but within each state and between different kinds of firms.”

New vs. Established

He cited as an example Nebraska, which ranked number one with the lowest tax burden for new firms.

“What we saw there was, let’s say, a call center business. A mature call center would have an effective tax rate of around 20 percent, whereas a new call center would have an effective tax rate of about 1.1 percent because of the lavishness of the incentives that they have for new businesses. So if you’re a well-established business, you would pay 10 times the amount of taxes as would a new firm. We see that repeatedly across the country.”

These incentives, of course, provide a disincentive for businesses to plant roots firmly in a state.

Distortions can also be seen in tax burdens on different types of businesses within states.

In Minnesota, for instance, a capital-intensive business such as a steel factory would pay a tax rate of approximately 6 percent. A distribution or warehouse facility would have an effective tax rate of approximately 46 percent.

‘Everyday Low Taxes’

“I mentioned that paying business taxes is a lot like buying a car, everybody pays a different price,” Hodge said. “The Wyomings and South Dakotas and Nevadas are more like CarMax. They have low taxes every day, and that attracts more customers. Those three states in particular do not have their own corporate income tax, and that really sets them apart from other states.” 

The study models seven types of businesses in two cities in each of the 50 states and accounts for all business taxes: levies on corporate income, property, sales, unemployment insurance, capital stock, inventory, and gross receipts. Each firm was modeled twice in each state: once as a new firm eligible for tax incentives, and once as a mature firm ineligible for incentives.

“The ‘Location Matters’ report should provide companies with an easy-to-use reference that will help shape their overall location decisions,” said KPMG Principal W. Hartley Powell of the firm’s Global Location and Expansion Services practice. “The report offers a comprehensive calculation of real-world tax obligations by firm types for all 50 states, making it a useful tool as companies work through the complexities of maintaining existing operations and establishing new operations.”

Internet Info

“Location Matters: A Comparative Analysis of State Tax Costs on Business,” Tax Foundation and KPMG LLP: