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Critical Site Selection Factor #7: Lower Corporate Tax Rate Rates = Stronger Economies

But have we hit a “tipping point” in how low rates can go?

Q4 2014
This series examines the top-10 site selection factors as decided by the respondents to AD's Q1 Corporate Executive Survey. Labor costs, skills, and highway access are top of mind; construction and occupancy costs are key; and availability of ICT infrastructure is getting closer scrutiny. Find out what else your company should consider when making its next location/expansion decision…

Corporate tax rates remained a high concern for those corporate executives polled by Area Development, ranking #7 among the location factors. The ranking was identical to a year earlier, but the factor scored higher in importance, at 82.4 percent, up from 79.3 percent.

The reason was simple: a state’s corporate tax rate is usually a bedrock indicator of its business-friendliness and a simple but substantial number that has a huge long-haul impact on the financial performance of a new plant or other facility. Tax rebates and other incentives can offset the overall corporate tax rate, but only to a certain extent.

“The tax rate is something that is there for the long term,” says Dean Uminski, a site selection consulting executive for Crowe Horwath. “Incentives go away, but in the long term, you’re stuck with rates. And a number of states now are moving to revise their corporate tax structure and trying to attract business for the long haul without incentives. Other states are going to a single sales tax or an apportionment for income tax. So states that haven’t revamped their tax structures might be of less consideration to some companies.” We talk to C-suite people who say that we’ve hit a tipping point on corporate taxes now because of examples like Kansas...They’re saying that there are basic services that governments provide, and if states cut taxes too much, they don’t have the revenue to do it. They want states to be able to pay for services and infrastructure and workforce development. Larry Gigerich, Managing Director, Ginovus

Indeed, company site selectors look at the broad array of taxes in a state — including personal income taxes, sales taxes, and even estate taxes, as well as corporate tax rates — when evaluating what kind of overall tax burden would come with a particular location. And in a number of states — including Ohio, Missouri, Colorado, Kansas, and Michigan — recently enacted packages have included substantial cuts in or restructuring of these other taxes.

But corporate tax rates alone are a telling indicator. In the aggregate of economic performance, which is an important criterion to companies considering sites, lower corporate tax rates outshine higher ones. The American Legislative Exchange Council evaluated 10-year economic-performance data for the 50 states and correlated that with the eight states with the lowest corporate income-tax rates and the eight states with the highest.

The conclusion: “States with low or no corporate income taxes are outperforming their high-tax counterparts.” Included in the former group were Nevada, Wyoming, Texas, Ohio, Alabama, North Dakota, and Colorado, whose top marginal corporate income tax rates averaged 2.46 percent — versus an average of 11.8 percent in the eight states with the highest such rates.

At the same time, however, states need to balance their desire for attractiveness on this score with other fiscal and economic priorities. In Kansas, for instance, the extent of incumbent Gov. Sam Brownback’s cuts in a variety of personal and business taxes became a lightning-rod issue in the 2014 re-election campaign because the cuts made it difficult for the state to fund all of its programs, and Standard & Poor’s even downgraded the state’s credit rating from AA+ to AA.

“We talk to C-suite people who say that we’ve hit a tipping point on corporate taxes now because of examples like Kansas,” notes Larry Gigerich, managing director of Ginovus. “They’re saying that there are basic services that governments provide, and if states cut taxes too much, they don’t have the revenue to do it. They want states to be able to pay for services and infrastructure and workforce development.”

And, of course, corporate tax rates have become a major issue on the global business stage. In 2014, a number of major U.S. companies proposed or carried out big acquisitions of foreign companies largely in order to qualify themselves for the significantly lower national corporate tax rates in other countries.

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