location matters and federal tax developments keynote presentation for the 94 th annual meeting of...

Location Matters and Federal Tax

DevelopmentsKeynote

presentation for

The 94th Annual

Meeting of the

Montana Taxpayers

Association

December 2nd, 2015

Scott GreenbergAnalyst

seg@taxfoundation.org

Location Matters

for Montana

Location Matters

Scott GreenbergAnalyst

seg@taxfoundation.org

There are many ways to rank state tax

systems1. According to the Tax Foundation’s 2016 State Business Tax Climate Index, Montana has the 6th best tax climate for businesses among states.• This is a measure of how well-structured states’ tax systems are.

2. According to the Tax Foundation’s 2015 Facts and Figures, Montana had the 21st lowest state and local tax collections per capita in 2012.• This is a measure of how much is collected by Montana state and local

governments.

3. According to the Tax Foundation’s 2011 Annual State-Local Tax Burden Rankings, Montana residents face the 13th lowest state and local tax burden.• This is a measure of what percentage is paid by state residents in all state

and local taxes, including those imposed by other states.

Location Matters

Scott GreenbergAnalyst

seg@taxfoundation.org

Location Matters measures how much businesses actually pay in taxes in each

stateLocation Matters is an apples-to-apples comparison of corporate tax costs in the fifty states.

• This helps answer the bottom-line question asked by business executives: “How much will my company pay in taxes?”

• It allows us to see which taxes are the most significant for different types of businesses.

• It sheds light on the cost and the significance of tax incentives.

• It illustrates how structural aspects of state tax codes can be as important as top-line tax rates.

Location Matters

Scott GreenbergAnalyst

seg@taxfoundation.org

The study analyzes seven model firm types

• Corporate headquarters

• R&D facility

• Retail store

• Capital-intensive manufacturer

• Labor-intensive manufacturer

• Call center

• Distribution center

Location Matters

Scott GreenbergAnalyst

seg@taxfoundation.org

We calculate tax rates for new and mature firms

• Many states give large incentives to new firms, often to the disadvantage of established firms.

• For instance, in Mississippi, new firms face lower effective tax rates than mature firms for every firm type besides retail stores:

Location Matters

Scott GreenbergAnalyst

seg@taxfoundation.org

A few key findings of Location Matters

1. Statutory tax rates only tell part of the story• Montana’s corporate income tax rate is 6.75 percent, but firms pay

between 2.3 percent and 7.3 percent of their income in corporate income taxes.

2. Corporate income taxes are just one part of the corporate tax burden• In Montana, only 2 of the 14 sample firms paid more in corporate

income taxes than in property taxes and unemployment taxes.

3. Different firms experience dramatically different effective tax rates• In Montana, a sample mature labor-intensive manufacturing firm

faced an effective total tax rate of 9.8 percent. Meanwhile, a sample new call center faced an effective tax rate of 26.6 percent.

Location Matters

Scott GreenbergAnalyst

seg@taxfoundation.org

The top-line results for Montana

Although Montana’s tax system is relatively well-structured and imposes a relatively low burden, some firm types face higher rates than average.

Location Matters

Scott GreenbergAnalyst

seg@taxfoundation.org

Contributing factors to Montana’s results

Statutory Rates 1. Mid-range corporate income tax rates

• 26th highest top rate, as of July 20152. Mid-range unemployment insurance tax rates

• 18th highest minimum rate, 37th highest maximum rate, as of July 2015

3. Mid-range property tax collections• 18th highest state and local property tax collections, FY 2012

4. No state sales tax

Location Matters

Scott GreenbergAnalyst

seg@taxfoundation.org

Contributing factors to Montana’s results

Other features1. Few targeted incentives for new firms

2. Three-factor apportionment formula

3. “Income producing activity” sourcing rules for services

4. Property tax on equipment

Location Matters

Scott GreenbergAnalyst

seg@taxfoundation.org

Montana vs. Neighboring States

Corporate Headquarters, Mature• Wyoming: 6.9% (1st)• South Dakota: 8.2% (2nd)• Montana: 9.0% (3rd)• North Dakota: 9.6% (4th)• Idaho: 13.7% (25th)

Location Matters

Scott GreenbergAnalyst

seg@taxfoundation.org

Montana vs. Neighboring States

Research and Development Facility, Mature• Wyoming: 6.2% (5th)• North Dakota: 6.9% (6th)• South Dakota: 7.4% (7th)• Idaho: 12.2% (27th)• Montana: 13.0% (32nd)

Location Matters

Scott GreenbergAnalyst

seg@taxfoundation.org

Montana vs. Neighboring States

Retail Store, Mature• Wyoming: 6.6% (1st)• South Dakota: 8.1% (2nd)• North Dakota: 10.9% (4th)• Montana: 12.9% (8th)• Idaho: 15.6% (26th)

Location Matters

Scott GreenbergAnalyst

seg@taxfoundation.org

Montana vs. Neighboring States

Capital-Intensive Manufacturer, Mature• Wyoming: 4.1% (3rd)• South Dakota: 4.2% (5th)• North Dakota: 9.0% (18th)• Idaho: 13.9% (36th)• Montana: 14.5% (40th)

Location Matters

Scott GreenbergAnalyst

seg@taxfoundation.org

Montana vs. Neighboring States

Labor-Intensive Manufacturer, Mature• Wyoming: 4.3% (1st)• South Dakota: 6.0% (8th)• North Dakota: 9.1% (25th)• Montana: 9.8% (28th)• Idaho: 11.7% (37th)

Location Matters

Scott GreenbergAnalyst

seg@taxfoundation.org

Montana vs. Neighboring States

Call Center, Mature• South Dakota: 12.8% (5th)• Wyoming: 14.4% (8th)• North Dakota: 16.8% (18th)• Montana: 20.3% (28th)• Idaho: 23.1% (36th)

Location Matters

Scott GreenbergAnalyst

seg@taxfoundation.org

Montana vs. Neighboring States

Distribution Center, Mature• Wyoming: 12.9% (1st)• South Dakota: 23.1% (19th)• North Dakota: 25.2% (21st)• Idaho: 25.6% (22nd)• Montana: 26.3% (24th)

Federal Tax Developments

Federal Tax

Developments

Scott GreenbergAnalyst

seg@taxfoundation.org

What’s Going on in Federal Tax Policy?

1. Negotiations over tax extenders

2. Funding for the Highway Trust Fund

3. Looking forward to comprehensive tax reform

Federal Tax

Developments

Scott GreenbergAnalyst

seg@taxfoundation.org

The Urgency of Federal Tax Reform

1. A tax code that hinders investment and growth

2. Excessive tax complexity

3. Over 150 narrow provisions targeted at special interests

Federal Tax

Developments

Scott GreenbergAnalyst

seg@taxfoundation.org

Candidate Tax Plans

Federal Tax

Developments

Scott GreenbergAnalyst

seg@taxfoundation.org

Candidate Tax Plans

Federal Tax

Developments

Scott GreenbergAnalyst

seg@taxfoundation.org

Similarities Between Candidate Tax Plans

1. Eliminate itemized deductions

2. Move to full expensing of capital investments

3. Lower corporate income tax rate

4. Lower individual income tax rates

5. Move to territorial tax system

6. Eliminate the Alternative Minimum Tax and the Estate Tax

Federal Tax

Developments

Scott GreenbergAnalyst

seg@taxfoundation.org

Four Approaches to Tax Reform

1. Cut rates across the board and increase the standard deduction• Bush, Trump, Santorum

2. Cut rates across the board, eliminate taxes on capital gains and dividends, and increase refundable credits• Rubio

3. Cut rates across the board, eliminate provisions for low-income taxpayers, and replace the corporate tax with taxes on shareholders• Jindal

4. Create a flat individual rate and replace the corporate income tax with a value-added tax• Rand Paul, Ted Cruz