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THE MAGAZINE OF CORPORATE REAL ESTATE STRATEGY & AREA ECONOMIC DEVELOPMENT
ONLINE INSIDER
A Site Selection Web Exclusive, May 2013
Add It Up
New analysis of state tax burdens on business reveals risks and
opportunities for companies and the territories they inhabit.
By ALEX ROSAEN, JASON HORWITZ and PATRICK ANDERSON
Anderson Economic Group

editor bounce@conway.com
A

s regular readers of Site Selection know, state and local tax policy isn't the only thing that matters to business, or even the most important — but it is one of the few factors that state and local governments can control.

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Alex Rosaen is director of public policy and economic analysis at Anderson Economic Group.

States face tough choices when deciding how best to serve their citizens and they must strike a delicate balance among providing services, taxing fairly and efficiently, and fostering a thriving business community. Our nation's 51 "laboratories of democracy" (including Washington, D.C.) have taken a variety of approaches to addressing this challenge, as shown in Anderson Economic Group's "State Business Tax Burden Ranking" study, now in its third edition.

State and Local Taxes Paid By Business

We examine 11 different broad categories of state and local taxes, including all major taxes paid by businesses and their owners on business activity. We found that businesses paid over $623 billion in state and local taxes in 2011. Perhaps surprising to casual observers of business climate is that state's corporate income taxes account for less than 10 percent of all state and local taxes on business activity. As shown in Table 1, property tax is by far the largest tax on business, accounting for 37 percent of state and local taxes in 2011.

Total State and Local Taxes Paid By US Businesses, 2011
Type of Tax Total Taxes Paid
($ Thousands)
% of Total
Property Tax $230,818,102 37.0%
Motor Fuel Sales Tax $8,547,173 1.4%
Public Utilities Sales Tax $28,450,396 4.6%
Other Selective Sales Tax $20,412,371 3.3%
Corporate Income Tax $46,734,649 7.5%
License Fees $48,110,092 7.7%
Unemployment compensation $78,208,719 12.5%
Individual income tax on pass-thru business income $24,092,952 3.9%
Severance $14,795,186 2.4%
Gross Receipts Taxes $7,421,908 1.2%
General Sales Taxes $115,979,996 18.6%
Total Taxes Paid by Businesses (in thousands) $623,571,542 100.0%
Sources: U.S. Census of Governments State and Local Finance Survey
Analysis: Anderson Economic Group LLC

Unemployment compensation taxes also accounted for a much larger share of the total business tax burden than corporate income taxes, accounting for 12.5 percent of the total — perhaps not surprising after several years of a depressed labor market, as businesses typically have to pay more of this tax if they have laid off workers in the recent past.

Perhaps surprising to casual observers of business climate is that state's corporate income taxes account for less than 10 percent of all state and local taxes on business activity.

Another under-appreciated tax on business is general sales taxes. We estimate that businesses' share of this category totaled over $115 billion in 2011, 18.6 percent of state and local taxes paid by business. While most states make attempts to exempt major business inputs from sales tax, this process is not perfect, and many purchases by businesses end up subject to the tax.

Tax Burden Rankings

So how "burdensome" are these taxes? Our approach to answering this question is straightforward: Estimate the amount of taxes paid by businesses, then divide it by a measure of businesses' pre-tax operating margin in the state.

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Jason Horwitz is a consultant at Anderson Economic Group.

This is a good measure of how "burdensome" these taxes are because it takes into account how much money these businesses have "left over" after paying for materials, payroll and other expenses. (For the precise definitions of each quantity, see our final report when it is released Tuesday, May 7.) This is the basis of our rankings: total business taxes as a percentage of total operating margins in the state.

Business tax burdens vary widely by state. The top five lowest burden states collected under 8 percent of businesses' operating margin, while the bottom five collected over 14 percent. Table 2 shows the top 10 and bottom 10 lowest business tax burden states. (Go to the bottom of this article for the complete ranking of all 50 states.)

States with Lowest and Highest Business Tax Burdens, 2010
Ten States with Lowest Tax Burdens Ten States with Highest Tax Burdens
% Rank % Rank
Delaware 5.1% 1 New York 12.4% 42
Oregon 5.7% 2 South Carolina 12.8% 43
Utah 6.2% 3 Michigan 13.3% 44
Louisiana 7.3% 4 Florida 13.4% 45
Georgia 7.8% 5 Maine 13.5% 46
South Dakota 7.8% 6 West Virginia 14.2% 47
Maryland 8.0% 7 Vermont 14.6% 48
North Carolina 8.1% 8 Wyoming 15.7% 49
Oklahoma 8.2% 9 North Dakota 16.8% 50
Idaho 8.3% 10 Alaska 25.2% 51
U.S. State Average 10.2%
Source: Anderson Economic Group LLC
Note: Rankings include Washington, D.C.

The ten states with the lowest tax burdens are: Delaware, Oregon, Utah, Louisiana, Georgia, South Dakota, Maryland, North Carolina, Oklahoma and Idaho. These states vary in their characteristics and taxing behavior.

Delaware is in the bottom 10 states in taxing property, motor fuels and other excise taxes, unemployment compensation and sales tax, but has the highest license fees as a proportion of pre-tax operating surplus. Oregon has no sales tax burden on business but is otherwise not a top-10 or bottom-10 state in any of the major categories. Louisiana is a bottom-10 state in sales tax and severance taxes, but is a top-10 state in other major taxes such as property and unemployment compensation taxes.

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Executive Editor Patrick Anderson is founder, president, and CEO of Anderson Economic Group.

The 10 states with the highest tax burdens are: Alaska, North Dakota, Wyoming, Vermont, West Virginia, Maine, Florida, Michigan, South Carolina and New York. The bottom-10 states also vary in their taxing strategies. Alaska has low taxes in several categories, including individual income and general sales taxes, but has by far the highest severance taxes as a proportion of pre-tax gross operating surplus. As a result, businesses in non-extractive industries (which do not directly pay severance taxes), likely do not face a high tax burden.

South Carolina is a relatively high-tax-burden state in several broader taxes, including a bottom-10 low tax burden state in property and unemployment compensation taxes. Similarly, Florida has a relatively high burden from bottom-10 categories that include property, public utilities, and general sales taxes, while having no individual income tax on pass-through business income.

Overall, each state approaches the issue of taxing according to its own economic situation and priorities, using its own strategy. States rely on taxes that are hard to "escape" when they can, such as severance taxes on oil and other extractive industries.

But many state residents may be surprised to learn that their state's largest taxes on business are not corporate or individual income taxes. Instead they include a long list of taxes that can add up.

STATE Tax Collected from
Business in 2011
(millions)
Share of Pre-Tax
Operating Surplus
RANK
Delaware $1,928 5.1% 1
Oregon $5,592 5.7% 2
Utah $3,392 6.2% 3
Louisiana $9,403 7.3% 4
Georgia $12,536 7.8% 5
South Dakota $1,520 7.8% 6
Maryland $8,773 8.0% 7
North Carolina $15,390 8.1% 8
Oklahoma $5,194 8.2% 9
Idaho $2,122 8.3% 10
Virginia $12,771 8.5% 11
Iowa $5,803 8.5% 12
Nebraska $3,641 8.6% 13
Arizona $9,442 8.7% 14
Connecticut $8,684 8.9% 15
Colorado $9,972 9.2% 16
Texas $53,552 9.2% 17
Missouri $8,662 9.2% 18
Tennessee $9,893 9.3% 19
Illinois $25,542 9.6% 20
Massachusetts $13,981 9.7% 21
California $83,385 9.9% 22
Minnesota $11,267 10.0% 23
Alabama $6,505 10.1% 24
New Hampshire $2,504 10.1% 25
Nevada $6,308 10.2% 26
Washington $14,290 10.3% 27
Indiana $12,863 10.6% 28
District of Columbia $2,906 10.6% 29
Hawaii $2,549 10.6% 30
Kansas $5,454 10.7% 31
Arkansas $4,685 10.9% 32
Ohio $20,018 11.1% 33
Kentucky $6,684 11.1% 34
Wisconsin $11,299 11.3% 35
New Jersey $21,724 11.3% 36
Rhode Island $2,259 11.4% 37
Montana $1,817 11.5% 38
Pennsylvania $25,865 11.5% 39
Mississippi $4,666 11.9% 40
New Mexico $3,804 12.0% 41
New York $58,008 12.4% 42
South Carolina $7,774 12.8% 43
Michigan $19,150 13.3% 44
Florida $39,854 13.4% 45
Maine $2,536 13.5% 46
West Virginia $3,550 14.2% 47
Vermont $1,293 14.6% 48
Wyoming $3,085 15.7% 49
North Dakota $3,403 16.8% 50
Alaska $6,272 25.2% 51
Source: U.S. Census of Governments State and Local Finance Survey
Analysis: Anderson Economic Group LLC

Anderson Economic Group LLC is a research and consulting firm with expertise in tax analysis, economics, public policy, financial valuation and market research. AEG's past clients across the country include governments, businesses, trade associations, universities, chambers of commerce and labor unions. AEG has offices in Chicago and East Lansing, Mich., where it is headquartered.



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