The Council On State Taxation (COST) is pleased to announce the release of a new study ranking states by tax burden on new investment. The study, “Competitiveness of State and Local Business Taxes on New Investment,” is the latest contribution by Ernst & Young in conjunction with COST to the growing field of research in the state and local business tax arena.
The study assesses the competitiveness of current state and local business taxes on mobile capital investment on a state-by-state basis.The rankings consider state and local statutory tax provisions and the financial characteristics of the new investments. The analysis focuses on capital investments in industries that have location choices such as factories or headquarters, rather than those like retailers or hotels that are tied to a specific geography. The estimated tax burdens on selected investments are combined to provide an overall measure of the business tax competitiveness of each state. The index includes all major state and local business taxes associated with new capital investments including corporate income and franchise taxes, real and personal property taxes and sales taxes on business input purchases. It focuses on five types of mobile capital investments that states compete to attract: headquarters facilities; research & development facilities; office and call center facilities; durable and nondurable manufacturing facilities.
Although many additional factors ultimately weigh into a decision by a company to invest in a state, this study advances the state and local tax portion of that equation well beyond an assessment of tax rates and bases, which is typically the norm. It does not consider certain variable issues such as combined reporting, availability of tax credits or incentives, certain industry specific taxes, and unemployment taxes. These variable issues are important—and can be the dominant factors in certain location decisions—but they are frequently industry or company-specific or limited to certain geographical regions and thus not suitable for a study of the “general” state and local business tax system.
Overall, the business tax competitiveness index shows a large difference in tax burdens among the states. Key findings include:
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Maine imposes the smallest burden on new investment due to factors such as a favorable corporate income apportionment formula that compensates for a relatively high tax rate, a property tax exemption for new equipment and low state and local sales tax rates.
Oregon ranks second due to an advantageous corporate income apportionment formula and the absence of a sales tax on business inputs and franchise taxes.
New Mexico’s state and local business tax system imposes the greatest burden of any state, resulting from factors such as a corporate income apportionment system that makes a large portion of the income from new investments taxable, an above average corporate tax rate and the imposition of a gross receipts tax on virtually all business activities.