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Critical Site Selection Factor #7: Corporate Tax Rate

In today’s world, corporate decision-makers want to invest in areas with a “fair” tax structure.

Q4 2016
This series examines the top-10 location factors from Area Development’s Q1/2016 Corporate Survey that determine where our readers will locate and/or expand their facilities. Availability of skilled labor is their primary concern, followed by highway accessibility. Our readers are also concerned about prospective locations’ quality of life. Find out what else companies like yours should consider when making your next location/expansion decision. This means that companies are comfortable paying a moderate level of taxes, if they see a return on the investment in key areas such infrastructure, education, healthcare, and public safety that benefits both the business and the employees. High-tax locations will struggle to secure new investment and jobs compared to lower-tax regions that return the same ROI, unless companies must locate in that high-tax area for other reasons.

With an increasingly global economy, companies have more options for where they decide to establish operations. In response, forward-thinking states are trying to improve their business climates and attract investment by reducing the tax burden, including corporate tax rates.

“Companies are subject to both state and federal corporate income taxes,” says Larry Gigerich, executive managing director for Ginovus in Indiana. “Federal corporate income tax rates range from 15 to 39 percent, depending on the business structure (LLC, C corporation, S corporation, etc.) and net income/profit level. State corporate income tax rates range from 0 to 12 percent, depending on the level of net income/profits; most are in the 4 to 8 percent range.”

Gigerich indicates that a mid-sized manufacturing company making an annual profit of $2 million would save approximately $150,000 to $175,000 annually by locating in a lower-tax state, compared to a higher-tax state.

A Plethora of Rates
When I look at tax rate, I don’t just focus on the corporate income tax rate. “I take into account all tax impacts, including property, sales, excise, and payroll. Bradley Migdal, senior managing director, Business Incentives Practice, for Cushman and Wakefield in Rosemont According to the Tax Foundation, 44 states levy a corporate income tax. Rates range from 4 percent in North Carolina to 12 percent in Iowa. Minnesota, Alaska, Connecticut, New Jersey, and the District of Columbia have corporate income tax rates of 9 percent or higher. Six states — North Carolina, North Dakota, Colorado, Mississippi, South Carolina, and Utah — have the lowest rates in the country, at or below 5 percent.

Further, Nevada, Ohio, Texas, and Washington impose gross receipts taxes instead of corporate income taxes. “Gross receipts taxes are thought to be more economically harmful than corporate income taxes,” writes the Tax Foundation. “South Dakota and Wyoming are the only states that do not levy a corporate income nor gross receipts tax.”

Although they are often regarded as a major tax, corporate income taxes account for just 5.3 percent of state tax collections and 3.9 percent of state general revenue, according to the Tax Foundation. Other state taxes such as property tax, inventory tax, and personal property tax vary greatly from state to state and add significantly to the overall tax load a company faces.

“When I look at tax rate, I don’t just focus on the corporate income tax rate,” says Bradley Migdal, senior managing director, Business Incentives Practice, for Cushman and Wakefield in Rosemont, Illinois. “I take into account all tax impacts, including property, sales, excise, and payroll.” This is critical information to know, he adds, because total tax impacts can vary dramatically according to even slight changes in location — for example, what side of the street a client chooses for its operation.

Reforming Tax Rates
Many states are reforming their tax structures to be more pro-business. According to the American Legislative Exchange Council, in 2015, 10 states cut their personal income tax burdens, eight states reduced corporate income tax or business franchise tax burdens, six states reduced their property tax burdens, four states cut excessively high fees or tolls, three states cut their sales tax burdens, and three states cut discriminatory taxes. In 2016, the most notable corporate income tax change was North Carolina cutting its corporate income tax from 5 percent to 4 percent, as a component of its multi-year phase-in of its comprehensive 2013 tax reform package — now making its corporate tax rate the lowest in the nation.

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