Despite the best intentions of the founding fathers of our country, the fact of the matter is not all states are created equal, especially when it comes to running a business. Some states have higher tax rates, others have more regulation, and many state legislatures have developed programs offering various incentives for business to start up or move to their state. This complexity means it is not easy for a businessperson to determine the best location for his or her enterprise.
To help businesses of different sizes and in all sectors, the Tax Foundation partnered with audit, tax, and advisory services firm KPMG to develop a landmark, comprehensive comparison of corporate tax costs in all 50 states. To offer the broadest perspective, Tax Foundation economists included seven model firms in the comparison (a corporate headquarters, a research and development facility, an independent retail store, a capital-intensive manufacturer, a labor-intensive manufacturer, a call center, and a distribution center), and then KPMG tax experts determined the tax bills for each business type in each state.
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The study was designed to encompass all taxes that a business might pay, including corporate income taxes, property taxes, sales taxes, unemployment insurance taxes, capital stock taxes, inventory taxes and gross receipts taxes. In addition, two models were run for each firm in each state: one as a new firm eligible for tax incentives and one as an established firm with no extra incentives.
Washington DC was included as a “51st state” for the purposes of this study.
Wyoming was hands-down the most attractive state for both new and mature business operations of all kinds in terms of taxes, appearing in the top 10 states in 10 out of the 14 total categories in the study.
Best and worst states for corporate headquarters in terms of taxes
According to the KPMG and Tax Foundation report, the top five states for setting up a corporate headquarters for mature firms are Wyoming, South Dakota, Montana, North Dakota and North Carolina.
The bottom five states for setting up a mature firm corporate headquarters are Iowa, Minnesota, Pennsylvania, New York and Washington DC.
The report highlights that most of the states with the lowest total tax rates for mature corporate headquarters do not have one or more of the major taxes such as a corporate income or sales tax. Wyoming and South Dakota both do not have corporate income taxes, and offer the lowest effective tax rates for mature corporate headquarters at 6.9% and 8.2% respectively, and Montana and Alaska, which have no state sales tax, are also highly competitive at 9% and 11.2%.
On the other hand, high corporate tax rates are responsible for tax burdens experienced by firms headquartered in higher tax states. Of note, six of the 10 highest tax cost states for mature corporate headquarters have business tax rates higher than 8.5%, topped by Iowa’s 12% top marginal corporate tax rate.
Best and worst states for R&D facilities
The best states for mature company research and development facilities are Nebraska, Hawaii, Louisiana, Indiana and Wyoming.
The worst states for mature firm R&D facilities are Kansas, West Virginia, Missouri, New York and Washington DC.
Of particular interest, R&D facilities actually enjoy a negative overall tax liability in five states (Louisiana, Nebraska, New Jersey, Hawaii, and New Mexico). In fact, in Nebraska, the tax credits are so large that they are greater than the model mature firm’s total tax liability. The report notes that given income taxes are probably going to to be low, property taxes represent the lion’s share of an R&D firm’s total tax liability in nearly all cases.
Moreover, since the revenue from an R&D operation is assumed to be largely outside the home state, income tax burdens are greatly reduced in states that tax income where the benefits are received. The KPMG – Tax Foundation report notes Maine, Maryland, and Wisconsin are generous with these tax rules.
Best and worst state for retail businesses
The top five states for running a mature retail business are Wyoming, South Dakota, Nevada, North Dakota and North Carolina.
The bottom five states for operating a mature retail business are Rhode Island, Pennsylvania, Minnesota, New York and Washington DC.
The report also points out that all three states with the lowest tax costs for mature retail operations (Wyoming, South Dakota, and Nevada) also not have a corporate income tax. Furthermore, two other states that are high in the state rankings for established retail operations, Washington and Ohio, have a gross receipts tax for businesses instead of a corporate income tax.
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