Tax conditions play a critical role in the site selection process for companies seeking a business-friendly tax climate for their operations. For 20 years in the site selection industry I have seen many companies eliminate states during the early-stage site selection process due to business climate factors such as corporate tax, income tax, property tax, unemployment insurance rates and sales taxes.
To help stay on top of the latest business tax conditions, I have always found The Tax Foundation to be one of the best business-tax monitoring resources in the United States. In its “2017 State Business Tax Climate Index,” the foundation identifies the best and worst states based on business tax climate and names a few states that have jumped up the rankings through revised tax policies.
The role of tax conditions in the site selection process
When kicking off a new site selection project, we typically start by asking a client if there are any states they want to avoid. Typically, our clients will immediately list states with high tax burdens or difficult labor laws, especially if it is an employee-intensive operation such as a call center. California is usually the first state they eliminate. Another factor often raised by clients is the sales tax rate, especially in e-commerce operations such as distribution centers. Property taxes are another critical factor for manufacturing plants and data centers that have a significant amount of personal property. Bottom-line, states with excessive business tax rates of any type need to be aware that they may get eliminated early in the site selection process and understand they may significantly limit their ability to attract new companies to their state.
Economic incentives are a tool to help offset tax implications
I have found that economic incentives are an excellent way to offset a company’s tax obligations especially in states with excessive tax rates. Economic incentives have been used for decades to help level the playing field between low and high tax states competing for a project. A great example is a high-profile manufacturing project that we recently located in Georgia. We were able to negotiate 10-years’ worth of property tax abatements and useable credits — saving the client $3.5 million. Similarly, in Kentucky we were able to use the state’s payroll withholding tax as a cash refund that brought down the effective labor rate by almost 50 cents per hour. This is a huge amount of money for people-intensive operations such as a call center with 500 or more employees. Another great example involves our retail projects where we negotiate sales-tax-sharing rebates whereby the city’s portion of the sales tax is rebated back to our clients. Regardless of the economic incentive program, it is critical to understand the long-term tax liabilities after the economic incentives have burned off.
The top 10 states with the best business tax conditions
Many of the states with the best tax conditions lack a major tax as a common feature. All states have property taxes and unemployment insurance taxes; however, several states don’t have one of the following: corporate income tax, individual income tax or sales tax. Wyoming, Nevada and South Dakota have no corporate or individual income tax; Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire, Montana and Oregon have no sales tax.
Based on the results of the Tax Foundation’s latest ranking, the following 10 states have been identified to have the best overall business tax climate:
The 10 worst states based on business tax conditions
We’ve always been taught that it’s never good to be last. The following 10 states, which ranked in the bottom 10, have similar challenges: complex, non-neutral taxes with comparatively high rates. As an example, New Jersey has some of the country’s highest property tax burdens, is one of two states to levy both an inheritance tax and an estate tax, and maintains some of the worst-structured individual income taxes in the country. And to no surprise, California ranks near last due to high property and unemployment tax rates.
The 10 worst ranked states were:
How the rest of the states compared
The following interactive diagram provides a summary of how the rest of the states compared in the study. (Please move your mouse over each state to see their ranking.)
Note: A rank of 1 is best, 50 is worst. Rankings do not average to the total. States without a tax rank equally as 1. D.C.’s score and rank do not affect other states. The report shows tax systems as of July 1, 2016 (the beginning of fiscal 2017).
Conclusions and findings
States are continually changing their tax structures so it is critical to monitor policy changes. Washington D.C., Delaware, Virginia and Louisiana dropped in rankings this year while Arkansas, Georgia, Alabama, Missouri, Tennessee and Indiana jumped up slightly. Because changing political landscapes will continue to cause the movement in state rankings, it is important to keep up to date on business tax climate factors during the site selection process.