The Council On State Taxation (COST) recently released its 13th annual study of state and local business taxes. The full report is available as a PDF towards the bottom of the news release. While the report refers to state and local business taxes, this post will refer to them as state business taxes.
What is different in this report?
Many state business tax rankings use only income tax rates. The COST report uses the actual total of taxes paid as a percent of the total state business taxes paid. What does this mean? The report includes not only business income taxes but also individual income taxes paid on business income, sales tax on business expenditures, business property taxes, licenses, unemployment taxes, excise taxes, severance taxes (on minerals, oil, etc.), and other business taxes.
Why does this matter?
Does a business really care what kind of tax they pay? Is it more important to pay little or no income tax at the cost of very high sales tax? Of course not. Total tax is what comes out of the business’ pocket not just one type of tax. For example, Nevada has no state individual or business income tax. So NV’s income tax rate is considered zero which would rank it at the top of any state tax ranking based solely upon rates. North Carolina has individual and corporate income taxes. However, NV businesses pay 53% of all state and local taxes while NC businesses pay only 38.8% of all state and local taxes. Further, the Total Effective Business Tax Rate (TEBTR) in NV is 5.9% while in NC it is 4.3%.
All other things being equal, even though NC has an income tax and NV does not, on average a business should prefer NC business taxes to NV business taxes.
Is COST the best state business taxes ranking?
Of course not. Every business is different and every state’s tax laws are different. Property taxes and general sales and use tax on inputs are the two largest components of state and local business taxes. However, many service business (like CPAs) have very little in property so their property taxes are low. For these businesses, income and payroll taxes become a much larger concern.
On the other hand, the rankings solely based upon income tax rates are not the best either.
What do you think, are state business taxes as a % of income a better measurement than a tax rate ranking? Please comment below.