Tax Break

Corporate state taxes vary widely, depend on industry, location and longevity, study finds

March 1, 2012

On Wednesday, the Tax Foundation came out with a study on the tax rates different types of businesses face in different states.

Broadly speaking, the foundation found that corporate taxation practices vary widely not only from state to state, but even from one business to another within any one state, and even between businesses in the same line of work in the same state depending on the age of their facilities, with newer locations getting sizable tax breaks and incentives.

“Until you see the data in black and white, these are just perceptions” of differences, Scott Hodge, president of the Tax Foundation, a think-tank that generally  favors lower tax rates for corporations, told me.

By putting numbers on the variations in tax rates that  businesses face, the foundation hopes to ignite debate and perhaps prompt greater fairness among taxpayers, Hodge said.

Michael LaFaive, director of fiscal policy for the Mackinac Center for Public Policy, a pro-free market  Michigan-based think-tank, said the report may get a serious hearing in state capitals.

But major tax reform takes time, cautioned Charles Ballard, an economics professor at Michigan State University who has written extensively on taxes.

“The mother of all tax reforms is to broaden the tax base and lower the tax rate,” said Ballard, but because companies don’t want to give up their particular tax deals, “politically, it’s exceedingly difficult to do that.”

Greg LeRoy, executive director of  Good Jobs First, which advocates for more accountability for economic development subsidies for corporations,  and a leading opponent of the kind of incentive deals that this study highlights the impact of, nevertheless wondered what the predictive value of the Tax Foundation’s study is.

Do states with low taxes for R&D facilities have lots of them? he asked. Are states that are generous to retailers, the mecca of shopping?

IRS data shows, Le Roy said, that after their federal deduction is factored in, state and local taxes only account for 0.8 percent of a typical company’s expenses. Things like occupancy costs, raw materials and labor are far bigger parts of the cost structure. “Tiny changes in those costs dwarf anything you can do with the tax code,” LeRoy said.

Many of the things that are most important to companies, like education, transportation, or safety, require taxation, noted Jon Shure, a state tax expert at the socially liberal yet fiscally conservative Center on Budget and Policy Priorities. Still issues of tax inequality are worth studying, Shure said.

Michigan, in the midst of implementing a significant corporate tax overhaul which eliminates many tax breaks in favor of a generally lower rate, was right in the middle of the Tax Foundation list, at No. 25.

The state had especially low taxes for manufacturers, but some of the highest taxes for retailers and distribution centers.

States with no corporate income tax, such as  Wyoming and South Dakota, ranked high. But for certain companies in those and other states, taxes were higher overall due to higher sales or property taxes or other taxes which brought their total tax assessment up sharply.

Big gaps were found between old and new. Nebraska, generally a low-tax state, assesses an effective tax rate on a mature call center of 20 percent while a new facility would pay just 1 percent, the study found.

Louisiana has a similarly lopsided benefit for new manufacturing plants, charging them a tax rate of 1 percent after incentives, while the more established facilities pay 11 percent.

In Arkansas, tax breaks for new research and development facilities bring their tax rate down to under 7 percent, compared to almost twice that for an established R&D plant.

“You could see how that could cause some resentment among established companies,” said the Tax Foundation’s Hodge.

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