April 14, 2010 New KPMG International Location Study: U.S. Is Falling Behind; Taxes Are a Major Fault Scott Hodge Scott Hodge Print this page Subscribe Support our work Download Fiscal Fact No. 221 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 tax 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 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 2010 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 in the table is an average that accounts for smaller firms that are not hit by the top rate. 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 income), the U.S.’s more generous depreciation 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 2010 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 in the table is an average that accounts for smaller firms that are not hit by the top rate. 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. Topics Center for Federal Tax Policy Center for State Tax Policy Business Taxes Corporate Income Taxes International Taxes Research
