Corporate Tax Burden: Property and Sales Taxes
When most people think of “corporate taxes,” corporate income tax is usually the first thing that comes to mind. Corporate income tax generates significant tax burdens for businesses, especially at the federal level, but at the state level, corporate income tax is only one of many taxes businesses pay. . For many businesses, state corporate tax burdens are dwarfed by other state and local taxes owed, which have far more bearing on a business’s location and investment decisions than many people realize. think so.
Moreover, high tax rates are only part of the equation; for many companies, the composition of a state’s tax base is just as important, if not more important, than tax rates. Our Location matters The study helps illustrate the extent to which property taxes, sales taxes, and other non-income taxes affect the overall tax burden of businesses at the state and local level, as well as the extent to which differences in tax bases between states result in differences in overall tax liability.
With Location matters, we design eight model businesses and place them in each state (both as new and mature businesses, since new businesses are eligible for many of the incentives denied to long-established businesses), calculating their tax liability. Across all mature businesses in our study, income taxes and other general business taxes that exist in some states (including gross receipts taxes) accounted for only 19% of business tax payable. , compared to 60% for property taxes, 15% for sales taxes, and 5% for unemployment insurance premiums. New businesses have often received such large incentives that they have been subject to negative income tax, although such businesses often still face high charges under other taxes.
the Location matters The study focuses on companies with large capital investments, and income taxes are likely to be higher for other business models not included in the study. Additionally, we only look at tax burdens in the state where a business is based. Businesses pay taxes in many states, and in other states in which they operate — but have less property and payroll — income taxes may predominate. But for the purposes of location decision-making, the state of origin is what matters, and our study illustrates how important non-“business” taxes can be for many businesses.
Property taxes are the primary source of revenue for local governments in the United States, generating approximately 72% of local tax revenue nationwide. Almost all local governments in the United States levy property taxes, and in some states property taxes also help fund state government services or are redistributed among jurisdictions for purposes such as school funding equalization. .
When most people think of property taxes, they think of taxes on the value of land and buildings, but for businesses, property taxes extend far beyond real estate, often applying to tangible assets like machinery, equipment and inventory, and sometimes even intangible property. ownership, such as the value of a company’s patents, trademarks, investments and goodwill. (Taxes on capital stock are also a form of property taxes and are treated as such in Site Although they are levied separately from other property taxes.) Real estate is an appropriate property tax base, as the value of land and buildings is a reasonable approximation of the value of local services received, but tangible property taxes and intangibles should be avoided. The value of a company’s tangible assets bears little relation to the value of the local services it receives, and these taxes are not neutral in their application, complex to administer and enforce, and distort investment decisions.
Currently, in addition to real estate taxes, commercial machinery value taxes are levied in 38 states and commercial inventory value taxes are levied in 10 states. These taxes are an important factor in the overall tax burden for businesses in capital or inventory intensive sectors such as manufacturing, agriculture, and retail, among others.
For example, for our distribution center models, property taxes often represent more than two-thirds of a company’s total tax burden at the national and local level, especially when professional equipment is included in the tax base. property tax. For example, Indiana has the ninth most competitive tax code on our State Enterprise Tax Climate Index, but because the property tax base includes commercial equipment, the Indiana tax code is much less hospitable to distribution centers than it is to most other types of businesses. In our Location matters study, the mature distribution center faces an effective property tax rate of 43.5% of net income in Indiana, while the mature technology center faces an effective property tax rate of only 5, 1%.
Sales tax is another major factor in the state’s corporate tax burden. In an ideal tax code, sales tax would apply to a broad base of final consumption goods and services while exempting business inputs. However, most state tax codes deviate from this ideal, with sales taxes applying to intermediate sales that occur during production. This leads to the tax pyramid, where taxes are embedded multiple times into the final product (or service). The tax pyramid increases production costs, and many of these increased costs are borne by consumers (albeit not transparently) in the form of higher prices.
One of the most important economic consequences of applying the sales tax to business inputs is its non-neutrality between businesses and industries. Companies with long supply chains or low profit margins should pay particular attention to which states tax the inputs they depend on and which do not. Of the 16 model companies in our study, the mature data center has the highest exposure to sales tax, with sales taxes accounting for an average of 41% of the company’s overall tax burden nationally and locally. Currently, data center equipment is fully or partially subject to sales tax in more than half of the states, significantly increasing the upfront costs associated with building a new data center. Likewise, manufacturing machinery is subject to sales tax in a number of states, which increases production costs.
As policymakers consider ways to improve their tax structure to encourage business investment and promote economic growth, corporate tax rate reductions are a crucial part of that conversation, but they shouldn’t be the only one. consideration. Most states have significant room for improvement in the way they structure their property and sales taxes, and much progress can be made by excluding tangible property from the property tax base and refraining from taxing property. applying the sales tax to business inputs.