Fiscal Fact No. 221
The image of the United States as a competitive place to do business was dealt another blow with the recent release of KPMG’s “2010 Competitive Alternatives,” the firm’s guide to international business location.[1] Of the ten countries ranked by several criteria—including labor costs, facility costs, transportation costs, and 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. costs—the U.S. ranked 8th, ahead of only Germany and Japan.
What should alarm federal and state lawmakers in the U.S. is that our border nations, Mexico and Canada, ranked first and second best respectively with the lowest overall cost of doing business of the ten nations surveyed, Mexico, which was the only emerging country included in the study, was determined to be the most cost-effective place to do business in large measure because of its low labor and facilities costs. Canada’s main advantage comes from the pro-business tax policies it has enacted over the past decade at both the federal and provincial levels. Since 2000, Canada’s combined corporate tax rate (federal and provincial) has fallen from 43 percent to 31 percent.
The Canadian government’s stated goal is to have the lowest statutory corporate tax rate among the major G-7 countries. Indeed, the government’s 2010 budget would lower the federal corporate rate from 18 percent to 16.5 percent as a first step toward lowering the rate to 15 percent by 2012.[2] This will bring the combined rate down to roughly 26 percent. However, that rate could fall further if the provinces continue to cut their rates. For example, Ontario recently announced a three-year plan to cut its corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. from 14 percent to 10 percent.
The KPMG study not only compares the business-cost competitiveness of the ten countries but also ranks 112 cities in those countries, including 15 in Canada and 60 in the U.S. Considering every factor, the most cost-effective city was Monterrey, Mexico, while Montreal was the top-rated Canadian city and Tampa the top-ranked American city.
On the tax side, KPMG considers corporate income taxes, capital taxes, sales taxes, property taxes and local business taxes. Table 1 compares corporate income taxes for selected cities across the ten countries. Two U.S. cities are included to illustrate the importance of state and local taxes. Businesses in Baltimore pay Maryland’s corporate income tax while businesses in Las Vegas benefit from Nevada’s zero rate.
|
Table 1Comparing Statutory and Effective Corporate Tax Rates in Selected Cities |
||||||
|
Country |
City |
Corporate Income Tax |
Effective Income Tax Rate* |
|||
|
Federal |
Regional |
Local |
Combined Income Tax Rate |
|||
|
U.S. † |
Baltimore |
34.00% |
8.25% |
– |
39.45% |
28.07% |
|
U.S. † |
Las Vegas |
34.00% |
– |
– |
34.00% |
26.98% |
|
Canada |
Toronto |
18.00% |
14.00% |
– |
32.00% |
17.91% |
|
Mexico |
Monterrey |
30.00% |
– |
– |
30.00% |
27.32% |
|
France |
Lyon |
33.33% |
– |
– |
33.33% |
19.30% |
|
Germany |
Frankfurt |
15.83% |
– |
16.10% |
31.93% |
30.51% |
|
Italy |
Milan |
27.50% |
4.82% |
– |
32.19% |
35.01% |
|
Netherlands |
Amsterdam |
25.50% |
– |
– |
25.50% |
14.85% |
|
U.K. |
Manchester |
28.00% |
– |
– |
28.00% |
22.83% |
|
Australia |
Melbourne |
30.00% |
– |
– |
30.00% |
16.32% |
|
Japan |
Osaka |
30.00% |
10.07% |
6.15% |
43.20% |
40.10% |
|
* Average of 17 firm types. † The top statutory U.S. federal rate is 35 percent. The 34 percent rate shown Source: KPMG |
Comparing the combined federal-regional income tax rate of these sample cities, neither Baltimore nor Las Vegas fares very well. Only Osaka, Japan, levies a higher statutory rate. Companies in Las Vegas face a combined statutory rate of 34 percent while those in Baltimore face a rate of 39.45 percent. Companies in Osaka face the highest combined rate of 43.20 percent while those in Amsterdam face the lowest rate of 25.50 percent.
However, for all companies, the “list price” statutory corporate tax rate is not the final tax rate they end up paying. KPMG also calculated the “effective” tax rate firms would pay after factoring in the various credits and deductions that each country has in their corporate tax code. The last column in this table indicates the effective tax rate for each location based upon the average of the effective rates paid by 17 different firm types within three major industries: manufacturing, corporate and IT services, and research and development (R&D).
By this measure of average effective tax rates for many industries, Baltimore and Las Vegas fare slightly better. With the advantage of Nevada’s lack of a corporate income tax, Las Vegas creeps into the middle of the pack, while Baltimore improves from 2nd highest to 4th highest. What tends to bring down the average effective tax rate for many U.S. industries is the deduction for domestic manufacturing (which has the effect of lowering the statutory rate from 35 percent to roughly 32 percent for manufacturers, or from 34 percent to 31 percent if the firm has less than $10 million in taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. ), the U.S.’s more generous depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. schedules for capital purchases, and the credit for research and experimentation (R&E credit). Table 2 gives a more comprehensive list of cities.
Conclusion
U.S. lawmakers who are worried about the economy’s slow recovery and weak job growth should take special note of KPMG’s latest international competitiveness study that ranks the U.S. only 8th best out of the ten countries surveyed for their cost-effectiveness for business. Of the 26 cost components that KPMG measured, many—such as labor costs, access to markets, and suitable land sites—are largely beyond the control of policy makers. Some components—such as crime rates, schools and universities, and the cost of housing—are not factors that can be improved quickly with policy changes.
However, tax policy is a factor that federal and state lawmakers can change immediately and that can have dramatic short-term and long-term benefits. Cutting the federal corporate tax rate would immediately improve U.S. competitiveness while setting the stage for long-term economic growth.
|
Table 2Comparing Statutory and Effective Corporate Tax Rates in Selected Cities |
||||||
|
Country |
City |
Corporate Income Tax |
Effective Income Tax Rate* |
|||
|
Federal |
Regional |
Local |
Combined Income Tax Rate |
|||
|
Netherlands |
Amsterdam |
25.50% |
– |
– |
25.50% |
14.85% |
|
Netherlands |
Brabant Stad |
25.50% |
– |
– |
25.50% |
14.92% |
|
Netherlands |
The Hague |
25.50% |
– |
– |
25.50% |
14.79% |
|
Netherlands |
Utrecht |
25.50% |
– |
– |
25.50% |
14.84% |
|
Canada |
Edmonton |
18.00% |
10.00% |
– |
28.00% |
15.65% |
|
U.K. |
Manchester |
28.00% |
– |
– |
28.00% |
22.83% |
|
U.K. |
London |
28.00% |
– |
– |
28.00% |
18.51% |
|
Canada |
Prince George |
18.00% |
10.50% |
– |
28.50% |
17.15% |
|
Canada |
Vancouver |
18.00% |
10.50% |
– |
28.50% |
17.15% |
|
Canada |
Montreal |
18.00% |
11.90% |
– |
29.90% |
12.39% |
|
Canada |
Quebec City |
18.00% |
11.90% |
– |
29.90% |
12.25% |
|
Canada |
Sherbrooke |
18.00% |
11.90% |
– |
29.90% |
11.77% |
|
Australia |
Melbourne |
30.00% |
– |
– |
30.00% |
16.32% |
|
Australia |
Adelaide |
30.00% |
– |
– |
30.00% |
16.12% |
|
Australia |
Brisbane |
30.00% |
– |
– |
30.00% |
15.67% |
|
Australia |
Sidney |
30.00% |
– |
– |
30.00% |
13.31% |
|
Canada |
Fredericton |
18.00% |
12.00% |
– |
30.00% |
10.46% |
|
Canada |
Moncton |
18.00% |
12.00% |
– |
30.00% |
10.86% |
|
Canada |
Saskatoon |
18.00% |
12.00% |
– |
30.00% |
13.01% |
|
Canada |
Winnipeg |
18.00% |
12.00% |
– |
30.00% |
16.00% |
|
Mexico |
Monterrey |
30.00% |
– |
– |
30.00% |
27.32% |
|
Mexico |
Mexico City |
30.00% |
– |
– |
30.00% |
27.29% |
|
Germany |
Berlin |
15.83% |
– |
14.35% |
30.18% |
28.67% |
|
Germany |
Frankfurt |
15.83% |
– |
16.10% |
31.93% |
30.51% |
|
Canada |
Toronto |
18.00% |
14.00% |
– |
32.00% |
17.91% |
|
Canada |
St. Catherines-Niagra |
18.00% |
14.00% |
– |
32.00% |
18.31% |
|
Canada |
St. John’s |
18.00% |
14.00% |
– |
32.00% |
9.62% |
|
Italy |
Milan |
27.50% |
4.82% |
– |
32.19% |
35.01% |
|
Italy |
Rome |
27.50% |
4.82% |
– |
32.19% |
35.01% |
|
France |
Lyon |
33.33% |
– |
– |
33.33% |
19.30% |
|
France |
Paris |
33.33% |
– |
– |
33.33% |
14.85% |
|
Canada |
Charlottetown |
18.00% |
16.00% |
– |
34.00% |
19.36% |
|
Canada |
Halifax |
18.00% |
16.00% |
– |
34.00% |
18.47% |
|
U.S.† |
Las Vegas |
34.00% |
– |
– |
34.00% |
26.98% |
|
U.S.† |
Cheyenne |
34.00% |
– |
– |
34.00% |
28.20% |
|
U.S.† |
Seattle |
34.00% |
– |
– |
34.00% |
26.49% |
|
U.S.† |
Sioux Falls |
34.00% |
– |
– |
34.00% |
28.00% |
|
U.S.† |
Spokane |
34.00% |
– |
– |
34.00% |
27.23% |
|
U.S.† |
Dallas-Fort Worth |
34.00% |
1.00% |
– |
34.66% |
27.87% |
|
U.S.† |
Houston |
34.00% |
1.00% |
– |
34.66% |
27.74% |
|
U.S.† |
McAllen |
34.00% |
1.00% |
– |
34.66% |
26.68% |
|
U.S.† |
Youngstown |
34.00% |
– |
1.00% |
34.66% |
28.63% |
|
U.S.† |
Montgomery |
34.00% |
6.50% |
– |
36.08% |
28.20% |
|
U.S.† |
Shreveport |
34.00% |
8.00% |
– |
36.56% |
27.50% |
|
U.S.† |
Denver |
34.00% |
4.63% |
– |
37.06% |
28.82% |
|
U.S.† |
St. Louis |
34.00% |
6.25% |
– |
37.06% |
30.47% |
|
U.S.† |
Greenville-Spartanburg |
34.00% |
5.00% |
– |
37.30% |
28.39% |
|
U.S.† |
Jackson |
34.00% |
5.00% |
– |
37.30% |
29.50% |
|
U.S.† |
Salt Lake City |
34.00% |
5.00% |
– |
37.30% |
29.38% |
|
U.S.† |
Atlanta |
34.00% |
6.00% |
– |
37.60% |
27.74% |
|
U.S.† |
Miami |
34.00% |
5.50% |
– |
37.63% |
29.59% |
|
U.S.† |
Tampa |
34.00% |
5.50% |
– |
37.63% |
29.95% |
|
U.S.† |
Honolulu |
34.00% |
6.40% |
– |
37.81% |
37.80% |
|
U.S.† |
Metro DC Virginia |
34.00% |
6.00% |
– |
37.96% |
28.94% |
|
U.S.† |
Oklahoma City |
34.00% |
6.00% |
– |
37.96% |
30.14% |
|
U.S.† |
Detroit |
34.00% |
6.04% |
– |
37.99% |
26.92% |
|
U.S.† |
Fargo |
34.00% |
6.50% |
– |
38.29% |
31.14% |
|
U.S.† |
Little Rock |
34.00% |
6.50% |
– |
38.29% |
30.12% |
|
U.S.† |
Nashville |
34.00% |
6.50% |
– |
38.29% |
29.78% |
|
U.S.† |
Saginaw |
34.00% |
6.04% |
0.50% |
38.32% |
27.39% |
|
U.S.† |
Albuquerque |
34.00% |
7.60% |
– |
38.44% |
30.33% |
|
U.S.† |
Billings |
34.00% |
6.75% |
– |
38.46% |
31.50% |
|
U.S.† |
Omaha |
34.00% |
7.81% |
– |
38.54% |
26.78% |
|
U.S.† |
Raleigh |
34.00% |
6.90% |
– |
38.55% |
29.60% |
|
U.S.† |
Phoenix |
34.00% |
6.97% |
– |
38.60% |
27.72% |
|
U.S.† |
Wichita |
34.00% |
7.00% |
– |
38.62% |
31.00% |
|
U.S.† |
Buffalo |
34.00% |
7.10% |
– |
38.69% |
28.80% |
|
U.S.† |
New York City |
34.00% |
7.10% |
– |
38.69% |
26.96% |
|
U.S.† |
Chicago |
34.00% |
7.18% |
– |
38.74% |
30.19% |
|
U.S.† |
Hartford |
34.00% |
7.50% |
– |
38.95% |
28.27% |
|
U.S.† |
Boise |
34.00% |
7.60% |
– |
39.02% |
30.68% |
|
U.S.† |
Milwaukee |
34.00% |
7.90% |
– |
39.21% |
29.21% |
|
U.S.† |
Baltimore |
34.00% |
8.25% |
– |
39.45% |
28.07% |
|
U.S.† |
Burlington |
34.00% |
8.50% |
– |
39.61% |
29.17% |
|
U.S.† |
Charleston |
34.00% |
8.50% |
– |
39.61% |
28.79% |
|
U.S.† |
Indianapolis |
34.00% |
8.50% |
– |
39.61% |
32.10% |
|
U.S.† |
Manchester |
34.00% |
8.50% |
– |
39.61% |
32.35% |
|
U.S.† |
Wilmington |
34.00% |
8.70% |
– |
39.74% |
30.62% |
|
U.S.† |
Boston |
34.00% |
8.75% |
– |
39.78% |
29.61% |
|
U.S.† |
Lexington |
34.00% |
6.00% |
2.75% |
39.78% |
31.22% |
|
U.S.† |
Los Angeles |
34.00% |
8.84% |
– |
39.83% |
30.94% |
|
U.S.† |
Riverside-San Bernadino |
34.00% |
8.84% |
– |
39.83% |
31.74% |
|
U.S.† |
San Diego |
34.00% |
8.84% |
– |
39.83% |
31.31% |
|
U.S.† |
San Francisco |
34.00% |
8.84% |
– |
39.83% |
30.07% |
|
U.S.† |
Cedar Rapids |
34.00% |
12.00% |
– |
39.88% |
27.06% |
|
U.S.† |
Bangor |
34.00% |
8.93% |
– |
39.89% |
31.64% |
|
U.S.† |
Providence |
34.00% |
9.00% |
– |
39.94% |
28.66% |
|
U.S.† |
Trenton |
34.00% |
9.00% |
– |
39.94% |
28.69% |
|
U.S.† |
Anchorage |
34.00% |
9.40% |
– |
40.20% |
40.90% |
|
U.S.† |
Minneapolis |
34.00% |
9.80% |
– |
40.47% |
27.15% |
|
U.S.† |
Harrisburg |
34.00% |
9.99% |
– |
40.59% |
30.64% |
|
U.S.† |
Philadelphia |
34.00% |
9.99% |
– |
40.59% |
29.95% |
|
U.S.† |
Portland |
34.00% |
6.60% |
3.65% |
40.77% |
33.12% |
|
Japan |
Osaka |
30.00% |
10.07% |
6.15% |
43.20% |
40.10% |
|
Japan |
Tokyo |
30.00% |
10.07% |
6.21% |
43.26% |
43.10% |
|
* Average of 17 firm types. † The top statutory U.S. federal rate is 35 percent. The 34 percent rate shown Source: KPMG |
[1] Report downloaded on April 7, 2010, from http://www.competitivealternatives.com/default.aspx.
[2] Jeffrey Hodgson, “Canada Keeps Corporate Tax Cuts in Place, Targets,” Reuters, March 4, 2010.
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