Corporations use various tools in selecting locations for capital investment and consider numerous factors in determining the optimal sites for such investment. These factors will vary from industry to industry, but several factors are key for most companies; these include labor availability, energy availability and costs, and corporate tax burden.
Increasingly, state and local incentive programs are added to this list of top factors because of the impact incentives have upon the other factors. For example, employee-training grants have an impact upon labor costs; electric and natural gas riders upon energy costs; tax exemptions and credits upon the tax burden, etc. As advisors to companies conducting location studies (and trying to secure state and local incentives), we can provide some insight into the importance of corporate tax burden and state and local incentives upon the site selection process.
Disparity Among Locations
Enhanced transportation modes and the Internet have tremendously changed the landscape for commerce in the United States and, indeed, globally. Certain U.S.-based companies that once depended upon close proximity to markets - such as manufacturers and providers of information services - can now serve customers from locations remote from their customers, where they can gain advantages from lower labor, energy, and tax costs. Yet other U.S. businesses - such as distributors, service companies, and retailers - still rely heavily upon proximity to markets. Although location factors such as highway access and distance to customers play a greater role in site selection for many of these firms, the importance of the other key factors of labor availability, energy availability, and tax burden become even more critical since these companies cannot necessarily serve customers from lower cost, remote locations.
On the cost side of location analysis, operating costs such as labor and energy have begun to align more closely among regions across the United States; one of the remaining areas where there is greater disparity of costs is tax. The primary state and local corporate taxes - including income/franchise tax, sales and use tax, and property tax - vary widely among states and municipalities. Such variations exist both in tax rates and in how the taxes are applied; i.e., differences are found among states in the types of taxes that are levied on corporations. For instance, while most states have a corporate income/franchise tax, many states have eliminated personal property taxes, making these states much more competitive in attracting production capital.
|Corporate Survey 2007
Combined Ratings* of 2007 Factors
|Site Selection Factors 2007
|| Energy availability and costs
|| Availability of skilled labor
|| Occupancy or construction costs
|| Available land
|| Corporate tax rate
|| State and local incentives
|| Environmental regulations
|| Tax Exemptions
|*All figures are percentages and are the total of "very important" and "important" ratings of the Area Development Corporate Survey and are rounded to the nearest tenth of a percent.
Increased Importance of Tax Burden
For companies whose location options are restricted to the continental United States, state and local tax burden plays an important role in site selection. There are several primary reasons for the importance of tax burden in corporate location decision-making, as follows:
1. The level of business taxes generated in a state is one factor to consider when determining the state's level of competitiveness as compared to the level of economic activity that is being taxed. In general, businesses usually base their location decision primarily on the origin-based taxes, such as property tax and sales tax, as opposed to destination-based taxes. For example, there are a few states - including Texas, Indiana, and Arizona - that generate the majority of business-related taxes from sales and property taxes. These states generate a significant portion of their taxes based on business capital located in the state.
2. State and local taxes, as a portion of operating costs, have increased over the past 10 years. In general, income taxes have increased three times faster than all state taxes. This is primarily due to the fact that states have become more aggressive in raising revenue from the business sector. When the economy is in a recession, the amount of tax revenue generation is greatly reduced. Many states experience revenue loss in relation to growing costs and incur deficits, which results in the need for additional sources of revenue. These sources often include changes in business tax structures and alternative taxing methods.
For example, the states of Ohio and Texas have recently undergone tax restructuring that shifts corporate tax burden away from production-based companies to consumer-based companies. Ohio tax restructuring replaced the state corporate income tax with a corporate activity tax or a modified gross receipts tax that moved the basis for corporate taxes from productive assets to out-of-state sales. Texas has also expanded its definition of a taxable corporation doing business within the state, and now the tax is calculated on the basis of gross revenues generated from the privilege of doing business within the state. Additionally, Ohio has phased out its personal property tax, as a means of shifting tax away from productive assets. This has relieved the tax burden on manufacturers and is equally valuable to companies that export goods from Ohio - either to other states or globally.
3. States are becoming more sophisticated about interpreting and drafting new tax law, which may result in incremental tax liabilities for some industries as opposed to others. For example, Michigan has revamped the Single Business Tax, which was once a gross receipts tax, to a modified gross receipts tax and income tax - the Michigan Business Tax. Although this change will affect business in different ways, the state's overall revenue collection will impact the state favorably.
4. With businesses downsizing in various sectors, states have also looked for other ways to increase revenue. Some states have increased the definition of "taxpayer" to include entities that were not previously subject to tax. States have also modified their tax bases by disallowing exemptions and deductions that were once allowed as part of the overall tax structure.