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You can read the full study below in ScribD or download the PDF here. The book’s introduction is below.
The following tables are included in the book but may also be viewed separately:
- Find your state’s pages here.
- View one of the seven firm type here.
- Summary tables for new and mature firms are here.
Download a PowerPoint presentation here.
Introduction
State and local taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
es represent a significant business cost for corporations operating in the United States; in fact, they often have a material impact on net operating margins. Consequently, business location decisions for new manufacturing facilities, corporate headquarter relocations, and the like often are influenced by assessments of relative tax burdens across multiple states.
Widespread interest in corporate tax burdens has led to a number of studies from a variety of think tanks, media organizations, and research groups. None of these studies, however, provide comparisons of actual state business tax burdens.
Some studies compare total tax collections or business tax collections per capita or as a percent of total tax revenue. The shortcoming of this approach is that collections are not burdens: many business taxes are collected in one state but paid by companies in other states. Comparing state collections thus does not accurately portray the relative tax burden that real-world businesses would incur in each state.
Some studies assess the relative value of tax incentives available for different types of businesses, such as new job tax credits, new investment tax credits, sales tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. s, and property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. abatements. However, these studies can give the incorrect impression that all businesses in a state enjoy such incentives. They also do not typically account for increased tax rates for mature businesses that may be required to support such incentives.
Some studies, including the Tax Foundation’s widely cited annual State Business Tax Climate Index, define model tax structure principles and measure the state’s tax code relative to that model. The State Business Tax Climate Index is a useful tool for lawmakers to understand how neutral and efficient their state’s tax system is compared to other states and to identify areas where their system can be improved. However, this does not address the bottom line question asked by many business executives: “How much will our company pay in taxes?”
Individual firms considering expansion frequently calculate their tax bill in various states, but these calculations are not often released publicly and are usually confined to a small number of states.
To fill the void left by these studies, the Tax Foundation, in collaboration with KPMG LLP, the U.S. auditA tax audit is when the Internal Revenue Service (IRS) conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. Selection can be at random, or due to unusual deductions or income reported on a tax return. , tax and advisory firm, set out to develop and publish a landmark, apples-to-apples comparison of corporate tax costs in the 50 states. Tax Foundation economists designed seven model firms, and KPMG modeling experts calculated each firm’s tax bill in each state. 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 taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. es. Additionally, each firm was modeled twice in each state: once as a new firm eligible for tax incentives, and once as a mature firm not eligible for such incentives.
Tax Foundation economists then used the raw model results to perform the ensuing industry and state comparisons. The result is a comprehensive calculation of real-world tax burdens that we designed as a valuable resource for a variety of stakeholders:
• Governors, legislators, and state officials can better understand and address their competitive position with other states.
• CEOs, CFOs, and corporate America can better evaluate the relative competitiveness of states in which they operate or states they are considering for investment.
• Businesses and trade organizations can better identify policy improvements for each state.
• Site-selection experts can screen states more accurately and quickly for consideration by their clients.
• National, state, and local media organizations can more effectively report on the tax competitiveness of the 50 states.
The Location Matters study, together with our annual State Business Tax Climate Index, will provide the tools to fully understand each state’s business tax system, the burdens it imposes, and a roadmap for improving it.
Study Overview and Key Findings
The study is comprised of four chapters and an appendix. Chapter 1 outlines the objectives and scope of the study. The chapter describes the seven model firms that were analyzed, the specific taxes that were included in the study, the locations that were chosen in each state, and the other factors that could influence the results.
Chapter 2 presents two measures of a state’s overall business tax competitiveness, first for mature firms and then for newly established firms. Each state is ranked based upon a composite score that is an average of the state’s scores across the seven different firm types. As Table 1 indicates, for mature firms, Wyoming ranks first overall with the lowest average tax burden across the seven firm types, while Pennsylvania ranks 50th overall with the highest average tax burden across the seven firm types. For newly established firms, Nebraska ranks first overall with the lowest average tax burden across the seven model firms while Hawaii ranks 50th with the highest average tax burden across the seven firms.
Chapter 3 focuses on each of the seven firm types and compares the tax burden in each state for both mature and new firms. These results are summarized in Tables 2 through 5. The first- and 50th-ranked states for each firm type are as follows:
• Corporate Headquarters:
Mature: Wyoming ranked first, Pennsylvania ranked 50th.
New: Nebraska ranked first, Pennsylvania ranked 50th.
• R&D Facility:
Mature: Louisiana ranked first, Pennsylvania ranked 50th.
New: Louisiana ranked first, Pennsylvania ranked 50th.
• Retail Store:
Mature: Wyoming ranked first, Pennsylvania ranked 50th.
New: South Dakota ranked first, Iowa ranked 50th.
• Call Center:
Mature: South Dakota ranked first, New Jersey ranked 50th.
New: Nebraska ranked first, West Virginia ranked 50th.
• Distribution Center:
Mature: Wyoming ranked first, Iowa ranked 50th.
New: Ohio ranked first, Kansas ranked 50th.
• Capital-Intensive Manufacturing:
Mature: Wyoming ranked first, Hawaii ranked 50th.
New: Louisiana ranked first, Maryland ranked 50th.
• Labor-Intensive Manufacturing:
Mature: Wyoming ranked first, Hawaii ranked 50th.
New: Louisiana ranked first, Hawaii ranked 50th.
Chapter 4 summarizes the results for each state. The chapter is aimed at legislators and reporters who need the basic facts on the state’s business tax system and brief talking points on why the state scored as it did for the key firm types.
The Appendix provides more detail on the study’s methodology and assumptions. It is intended for the serious researcher who wants to understand how the modeling was done and where to find the source data for the tax information.
The Tax Foundation is indebted to Hartley Powell, Ulrich Schmidt and Ann Holley at KPMG for all of their expertise, research, and guidance on this project. Also, this project would not have been possible without the tremendous support of Glenn Mair of MMK Consulting.
Tax Foundation contributors include: Scott Drenkard, Alicia Hansen, Joseph Henchman, Scott Hodge, Nick Kasprak, Laura Lieberman, David Logan, Will McBride, and Kail Padgitt. The Tax Foundation is responsible for all of the analysis and data presented in this report and, of course, any errors.
About the Tax Foundation
Founded in 1937, the Tax Foundation is a nonpartisan, 501 (c )(3) not-for-profit organization dedicated to providing taxpayers and lawmakers reliable data and sound analysis on public finances at the federal, state, and local levels of government.
About KPMG LLP
KPMG LLP, the audit, tax and advisory firm (www.kpmg.com/us), is the U.S. member firm of KPMG International Cooperative (“KPMG International”). KPMG International’s member firms have 138,000 professionals, including more than 7,900 partners, in 150 countries.