ernst and young tax burden study

!@#

Analysis of Milwaukee’s relative business

tax burdens

August 2010

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TABLE OF CONTENTS

TABLE OF CONTENTS................................................................................................i EXECUTIVE SUMMARY ............................................................................................. ii Overview.......................................................................................................... 1 I. Comparative Assessment ................................................................................ 3

Composition of Wisconsin’s State and Local Business Taxes .................................. 3 Inventory of Business Taxes ............................................................................. 5

A. Corporate Income Tax ............................................................................... 5 B. Business Tax Credits ................................................................................. 9 C. Property Tax .......................................................................................... 12 D. Unemployment Insurance Tax .................................................................. 13 E. Sales Tax on Business Input Purchases ...................................................... 14 F. Individual Income Taxes ........................................................................... 15

Who Bears the Burden of Wisconsin Business Tax Increases? .............................. 19 II. Business Tax Competitiveness ....................................................................... 22

Overview ..................................................................................................... 22 Comparison Across Industries ........................................................................ 23 State vs. Local Business Tax Burdens .............................................................. 23 Composition of Business Tax Rates by Type of Tax ............................................. 26 Impact of Statutory Credits on Business Tax Liabilities....................................... 33

III. Combined Business and Household Tax Burdens ............................................. 34 Appendix A ................................................................................................... A-1 Appendix B.................................................................................................... B-1

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Analysis of Milwaukee’s Relative Business Tax Burdens

EXECUTIVE SUMMARY

This report has been prepared by Ernst & Young LLP (EY) for the Metropolitan Milwaukee Association of Commerce (MMAC). MMAC is interested in knowing how Milwaukee compares to other selected locations in terms of state and local business tax competitiveness. To answer this important tax policy question, EY completed the following: 1) an inventory of the key statutory state and local tax features in selected locations in fourteen states, 2) estimates of the effective tax rates that businesses pay on new investments in each location, and 3) estimates of the combined business taxes and employee individual income and property taxes in each location. The analysis in this report provides information on state and local business tax competitiveness in Milwaukee compared to fourteen other locations for four representative industries: industrial machinery manufacturing, information technology, financial funds management and management offices. The comparison locations and industries were selected by MMAC. Milwaukee’s business tax competitiveness depends upon the combined impact of the state and local taxes imposed on business, including corporate income and franchise taxes, sales taxes on business inputs, and property taxes. The competitiveness analysis in this study provides a systematic method for determining these overall business tax burdens for the selected industries, as well as the burdens for selected taxes. In addition to state and local taxes imposed on the business expansions, the additional employees added as a result of the business expansions pay significant state individual income taxes and local property taxes. The analysis includes estimates of the relative size of these employee tax burdens across the 15 locations. The employee tax burdens are combined with the business tax burdens to derive an overall state and local tax burden comparison. Key Findings from the State and Local Business Tax Inventory

• Businesses operating in Wisconsin paid an estimated $9.7 billion in state and local taxes in fiscal year 2009. Business taxes equaled 41% of all state and local taxes ($23.6 billion) collected in Wisconsin in 2009. Milwaukee’s business tax competitiveness depends upon this combined state and local business tax burden.

• The property tax is the largest business tax, accounting for 46.5% of total

Wisconsin state and local business taxes. The sales tax on business inputs and

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the corporate income tax accounted for 16.2% and 6.7% of the total, respectively.

• The property tax share of state and local business taxes in Wisconsin is 27%

higher than the average share for the 14 states included in this analysis, while the sales tax share is 25% lower than the average for the comparison states.

• Wisconsin’s statutory corporate income tax rate (7.9%) is 5th highest among

the comparison states. The single sales factor apportionment formula reduces effective corporate income tax rates for multistate firms with substantial sales outside of Wisconsin.

• The Milwaukee location also differs from the comparison locations in the level

of combined state and local statutory sales tax rates. The statutory rate in Milwaukee (5.5%) is more than 21% below the average for all locations. While the sales tax paid on business input purchases may be less visible than property taxes or corporate income taxes, they can have a significant impact on relative business tax burdens.

• Wisconsin is unusual among the comparison states in that residential property

taxes are significantly higher than property taxes on commercial and industrial property. In addition, residential property taxes are relatively high compared to property taxes on homes in other states. A recent study estimates that higher-value homes in Milwaukee have effective property tax rates that are 6th highest among the 50 states. In contrast, Milwaukee ranks 38th highest for industrial property and 19th highest for commercial property.

• Wisconsin’s relatively high property taxes on residential property, combined

with relatively high effective individual income tax rates on higher-income taxpayers, suggest that Milwaukee business employers may have to pay employees higher wages to offset these higher personal tax burdens.

• Relative to all 50 states, Wisconsin is ranked 12th highest in terms of the

percentage of a business tax increase that is expected to be borne by state residents through lower spendable income through either higher prices for consumer purchases or lower wages and salaries. The Wisconsin percentage is 80%. For the comparison locations used in this study, Wisconsin’s percentage is tied with Florida for second highest.

This tax “incidence” measure indicates that, in the long run, Wisconsin business tax increases fall primarily on state residents through a combination of higher prices of consumer purchases and lower incomes. Only 20% of a business tax increase is shifted to non-resident investors and consumers. It

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also means that a reduction in business taxes would primarily benefit Wisconsin residents.

• Wisconsin imposes a relatively low sales tax burden on business input purchases due to a low combined state and local sales tax rate of 5.5%. The combined rate is 22% below the average for the 15 locations.

Key Findings from the Competitiveness Analysis

• The competitiveness analysis compares business tax burdens in Milwaukee and 14 other locations using effective tax rates (ETRs). The ETRs measure the percentage reduction in before-tax income due to the payment of state and local business taxes.

• The overall state and local business tax ETR in Milwaukee for industrial

manufacturing is 15.6% below the average for all 15 locations. The relatively low overall ETR reflects property tax exemptions for tangible property used in manufacturing, a relatively low property tax rate, significant sales tax exemptions on machinery and equipment purchases, and the favorable impact of single sales factor apportionment for the corporate income tax.

• For the industrial machinery manufacturing example, Milwaukee is ranked

13th. However, Milwaukee’s overall ETR is closer to competitor states than suggested by the rankings. Milwaukee’s overall industrial machinery manufacturing ETR (5.4%) is very close to the average rate (5.5%) for the nine lowest ranked locations. This group is significantly below the ETRs for the group of six states that have significantly higher effective tax rates (average of 7.8%).

• Milwaukee is ranked 14th in overall ETR for information technology, almost

20% below the 15-location average. Milwaukee’s ETRs for financial funds management and management offices are also below average. The management offices example is 15.6% below the average for the comparison states, while the financial funds management example is 14.2% below the average.

• The ETR rankings for the other three industries also show that Milwaukee’s

ETRs are similar to the tax rates in the six to eight states in the second tier of states with below-average ETRs. In other words, the average ETR in each industry are being pulled up by significantly higher tax rates in four or five states included in the analysis. While lower than the top tier states, Milwaukee’s ETRs are in line with the ETRs for the second tier of locations.

• Milwaukee’s ranking for local taxes tends to be lower than state tax ranking

because of relatively low property taxes on industrial and commercial

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property. The relatively low ETR estimate for property taxes is consistent with other interstate business tax study results.

• In terms of ETRs for state and local corporate income taxes, the Milwaukee

location ranks 7th highest for management offices, 8th highest for information and financial funds management and 9th highest for industrial machinery manufacturing.

• Because of single sales factor apportionment, corporate income tax ETRs are

sensitive to the assumed share of in-state sales applied to the expansion. For companies making a large percentage of their sales to out-of-state customers, the single sales factor formula provides substantial reductions in effective corporate tax rates.

• For manufacturing, statutory credits tend to provided a greater reduction in

ETRs for the states with the highest before-credit ETRs (Charlotte, Detroit, Baltimore and Pittsburgh). Statutory credits provide relatively less tax relief for the other three industries. Milwaukee’s statutory credits are close to the industry averages in the analysis.

Key Findings from the Combined Business and Employee Tax Burden Analysis

• Milwaukee imposes relatively high individual income and residential property taxes compared to the other locations. In combination with relatively high industry wages, the new employees added in the business expansions pay relatively high income and property taxes in Milwaukee.

• Combining the business and employee tax burdens, Milwaukee emerges as one

of the least competitive locations for the machinery manufacturing and information technology industries.

Milwaukee ranks 3rd highest for machinery manufacturing, just behind Buffalo and Detroit, compared to 13th highest for business taxes. For the information technology expansion, Milwaukee is tied with Baltimore as the highest taxed location, compared to 14th highest for business taxes on this industry.

• Milwaukee ranks 7th highest for combined business and employee taxes for the financial funds management expansion, compared to 11th for business taxes only. For the management offices expansion, Milwaukee’s rank remains 9th highest. The difference in rankings between business taxes and combined business and employee taxes is less for these industries because the expansions add fewer employees with lower wages.

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Policy Implications

• It is important to determine which states Wisconsin is competing with for new jobs and capital investments. As noted, Wisconsin’s ETRs are much closer to those in the second tier (ranked by ETRs) of competitor states included in this study. The figures show that the average ETRs for all 15 locations are being pulled up by four high-tax locations (Charlotte, Nashville, Detroit and Baltimore). For the other locations, Milwaukee does not have a significant advantage in terms of state and local business tax burdens. To be more competitive with the second tier states, Wisconsin would have to reduce overall business tax burdens.

• Wisconsin is most competitive in terms of state and local business tax burdens

on industrial machinery manufacturing. Corporate income taxes account for a much larger share of business taxes for financial funds management and management offices. However, for information technology, sales taxes on business inputs accounts for the largest share of the business tax burden. For industrial machinery manufacturing, unemployment taxes account for the largest percentage of business taxes. Because different tax types account for different shares of the combined state and local tax burdens for the selected industries, business tax reform in Wisconsin will likely involve a package of changes affecting multiple business taxes.

• Wisconsin’s tax competitiveness is determined by more than just state and local

business taxes paid directly by businesses operating in the state. Residential property taxes and individual income taxes also affect tax competitiveness indirectly. This occurs if business has to pay relatively higher wages to employees to offset Wisconsin’s relatively high property taxes on homes and income taxes on earnings. Any discussion of improving Wisconsin’s tax competitiveness needs to address simultaneously business taxes, property taxes on residential property and Wisconsin’s individual income tax.

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Analysis of Milwaukee’s Relative Business Tax Burdens Overview This report has been prepared by Ernst & Young LLP (EY) for the Metropolitan Milwaukee Association of Commerce (MMAC). MMAC is interested in knowing how Milwaukee compares to other selected locations in terms of state and local business tax competitiveness. To answer this important tax policy question, EY completed the following: 1) an inventory of the key statutory state and local tax features in selected locations in fourteen states, 2) estimates of the effective tax rates that businesses pay on new investments in each location, and 3) estimates of the combined business taxes and employee individual income and property taxes in each location. The analysis in this report provides information on state and local business tax competitiveness in Milwaukee compared to fourteen other locations for four representative industries: industrial machinery manufacturing, information technology, financial funds management and management offices. The comparison locations and industries were selected by MMAC. The first study component, an inventory of tax features, compares the key statutory tax and credit features that are expected to have an impact on Wisconsin’s business tax competitiveness. However, comparisons of the statutory tax features are only the starting point for a more in-depth analysis of tax competitiveness, primarily because this comparison does not provide information on the contribution that the key features make to tax liabilities or the relative size of each state and local tax in determining overall business tax burdens. The second component of the study, estimates of effective business tax rates, uses the statutory information from the first component to estimate the dollar amounts of taxes paid by each industry in the selected locations. The tax estimates are derived from EY’s business tax competitiveness model (BTCM) that calculates state and local business tax burdens imposed on new capital investments at each location. The analysis looks at the burden of major state and local business taxes over the life span of an investment. The same model can also be used to estimate the effect of tax policy changes on Milwaukee’s business tax competitiveness, which may contribute to higher long-run state economic growth. In addition to the business taxes on the expansions, employees added in the expansions pay significant state individual income taxes and local property taxes. The last component of the study reports estimates of the relative size of these employee tax burdens across the 15 locations. The employee tax burdens are combined with the business tax burdens to derive an overall state and local tax burden comparison. Section I presents the results of the comparative analysis of the statutory tax features

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in each location. Section II summarizes the results of the business tax competitiveness analysis. The results are presented as effective tax rates for combined state and local taxes and for each major state and local tax. Section III reports the results of the combined business and employee tax burden comparisons.

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I. Comparative Assessment The comparative analysis provides an overview and inventory of significant state and local business tax features in Milwaukee and the fourteen following locations: Baltimore, MD Kansas City, MO Buffalo, NY Minneapolis, MN Charlotte, NC Nashville, TN Chicago, IL Orlando, FL Cleveland, OH Pittsburgh, PA Detroit, MI St. Louis, MO Indianapolis, IN Dallas, TX The first section of the comparative assessment looks at the size and composition of Wisconsin state and local taxes on business and compares Wisconsin’s composition with that in the comparison states. The second section provides the inventory of business tax and personal income tax features for each location. Details are provided for corporate income taxes, business tax credits, property taxes, unemployment insurance taxes, sales taxes and individual income taxes. The final section examines the expected impact of business tax increases on Wisconsin households in the form of higher prices for goods and services and lower wages paid employees. In other words, it discusses who is expected to bear the burden of an increase in business taxes in Wisconsin. Composition of Wisconsin’s State and Local Business Taxes Wisconsin’s business tax competitiveness depends upon the combined impact of all state and local business taxes imposed in Wisconsin and the comparison locations. Table 1 shows the estimated level and distribution of Wisconsin state and local business taxes by tax type for fiscal year 2009. As shown in Table 1, Wisconsin businesses paid over $9.7 billion in total state and local taxes in FY 2009. The single largest business tax is the property tax, a tax on highly mobile capital investment.1 As shown in the table, the property tax accounts for 46.5% of combined

1 The business property tax estimate in the 50-state study begins with an estimate of owner-occupied housing

property taxes reported as itemized deductions on federal individual income tax returns filed by Wisconsin taxpayers in 2007. The reported property tax deduction amount was $4.0 billion. Assuming that 8% of filers do not itemize, this amount was increased to $4.3 billion to estimate total property taxes on owner-occupied housing. Compared to $8.4 billion of total Wisconsin property tax collections reported by the U.S. Census Bureau, Wisconsin households paid 50.8% of total property taxes. The business property tax share was estimated to be the remaining 49.2% of total property taxes. This share was used to compute the FY2009 business property tax amount based on FY2009 property tax collections reported by the Census Bureau. It should be noted that this estimating methodology classifies all property taxes paid on residential rental property as business property taxes.

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state and local business taxes in Wisconsin, followed by sales taxes imposed on business inputs at 16.2% of the total. The corporate income tax accounts for 6.7%. General sales and use taxes, generated by business purchases of taxable goods and services, include intermediate inputs and capital expenditures but exclude any sales and use taxes that business collects from final consumers. The corporate income tax amount in Table 1 includes the franchise tax plus the corporate income tax imposed on taxable net income. The individual income taxes are the income taxes paid by individuals on business income from partnerships, LLCs, and sole-proprietorships. While these forms of business do not pay tax at the entity level, their owners and investors pay significant individual income taxes equivalent to 5.6% of total Wisconsin state and local business taxes.

Table 1 FY 2009 Wisconsin

State and Local Business Taxes

Business Tax FY 2009 (billions)

% Total Taxes

Property taxes on business property $4.5 46.5% General sales taxes on business inputs 1.6 16.2 Excise and gross receipts taxes 0.7 8.1 Corporate income tax 0.7 6.7 Unemployment insurance tax 0.7 6.7 Individual income tax on business income 0.5 5.6 License and other business taxes 1.0 10.2 Total Business Taxes $9.7 100.0%

Source: Ernst &Young, FY2009 50-State Business Tax Study, March 2010.

Table 2 compares the distribution of business taxes for Wisconsin and the 13 other states included in the analysis. The most important difference shown in the table is Wisconsin’s relatively heavy reliance on the property tax. Wisconsin is 3rd highest in the share of property tax in total state and local business taxes; Wisconsin’s share exceeds the national average by 10%. Reducing business property taxes was a key component of the recent tax reform packages in Michigan, Texas, and Ohio.

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Table 2 Composition of State and Local Business Taxes, by Type, FY2009

StateProperty

Tax Sales Tax

Excise and Gross Receipts

Corporate Income

Unemploy-ment

Insurance Tax

Individual Income

TaxLicense

and Other

Total Business

TaxesFlorida 41.9% 19.1% 24.4% 5.3% 2.5% 0.0% 6.8% 100.0%Illinois 40.5 14.0 16.6 10.4 6.3 4.1 8.0 100.0Indiana 47.6 21.4 5.9 9.0 5.4 6.0 4.6 100.0Maryland 26.1 16.7 18.2 8.7 4.4 9.9 16.0 100.0Michigan 52.0 18.7 7.1 4.2 8.6 4.4 5.0 100.0Minnesota 36.2 19.2 13.9 7.8 7.9 7.9 7.1 100.0Missouri 33.2 25.4 13.9 3.3 6.9 7.6 9.7 100.0New York 38.5 20.4 7.3 18.4 4.2 8.4 2.8 100.0North Carolina 30.9 21.9 15.3 7.5 7.1 8.0 9.4 100.0Ohio 39.9 18.0 12.8 5.6 5.1 6.6 12.0 100.0Pennsylvania 34.8 14.9 13.1 7.6 9.1 6.7 13.7 100.0Tennessee 32.8 29.6 11.2 8.6 4.7 0.4 12.6 100.0Texas 42.9 26.0 11.9 0.0 2.0 0.0 17.1 100.0Wisconsin 46.5 16.2 8.1 6.7 6.7 5.6 10.2 100.0U.S. Average 36.5 21.5 12.0 8.6 5.2 5.5 10.8 100.0 Source: Ernst &Young, FY2009 50-State Business Tax Study, March 2010. Inventory of Business Taxes The tax parameters presented in the following sections provide a summary of the significant features of state and local business (and individual income) tax systems in Milwaukee, Wisconsin and 14 comparison locations selected by MMAC. Differences in the statutory provisions of the state and local taxes in each location determine a location’s business tax competitiveness. A. Corporate Income Tax Table 3 summarizes key statutory state and local corporate income tax rates for the 15 locations compared in this report. It also includes information on filing status, apportionment factors, the sourcing of sales, and the extent to which states conform to the federal corporate income tax base. Wisconsin’s top marginal corporate tax rate is 7.9%, the 5th highest state tax rate of the states in comparison. Three municipalities impose an additional local corporate income tax: Kansas City, St. Louis and Cleveland. Five of the 14 states, including Wisconsin, require combined reporting. Seven of the 14 states apportion corporate

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income using a single sales factor (SSF) formula, and Indiana and Minnesota are currently phasing in SSF.2 The next set of columns identifies the sourcing rules for service sales, including cost of performance (CoP) and market based sourcing (MBS). Five of the states, Florida, Indiana, Missouri, North Carolina, Pennsylvania, and Tennessee, source service income to the state where the greater proportion of income production occurs. The remaining states use market-based sales sourcing rules. The federal tax base conformity information in Table 3 shows the extent to which states are decoupling from the federal base. State decoupling from Sec. 179 has occurred in Wisconsin, Florida, Indiana, Maryland, and Minnesota. In Minnesota, taxpayers must add back to federal taxable income, 80% of the amount by which the deduction allowed by current Sec. 179 exceeds the deduction allowable under Sec. 179 as amended through 12/31/2003. Four of the comparison states (Florida, Illinois, Missouri, and Pennsylvania) allow the Sec. 199 deduction. Michigan, Ohio, and Texas follow different methods of corporate taxation:

• Michigan: Michigan’s business tax (MBT) consists of two parts: the net income tax (4.95%) and the modified gross receipts tax (0.80%). A 21.99% surcharge is applied to the apportioned business income tax and gross receipts tax before credits, and is reflected in the effective tax rate of 6.04% listed in Table 3. The starting point for the business income tax base is federal taxable income from business activity. For the gross receipts tax, the tax base is the business’s gross receipts less “purchases from other firms” before apportionment.

• Ohio: The base for Ohio’s commercial activity tax (CAT) is gross receipts from

business activities in Ohio. Only Washington State has a similar gross receipts tax as its general, business-entity tax.

• Texas: Texas imposes a margin tax of 1% to a taxable entity’s total revenue less

the greater of (1) compensation, (2) cost of goods sold, or (3) 30% of total revenue. The 1% rate is reduced to 0.5% for retailers and wholesalers.

Ohio and Texas adopted the new business tax bases as replacements for existing corporate income taxes; Michigan’s new system replaced the single business tax, a modified value added tax. All three states apply the new taxes to almost all forms of doing business.

2 Some of these locations have special apportionment rules that apply to the selected industries. These differences

are included in the calculation of effective tax rates in the competitiveness analysis discussed in the next section.

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Table 3 Corporate Income Tax Parameters

Location Filing Status

Apportionment Conformity with the Federal Base8

Tax Rates

Formula Weights Sourcing

State City

Combined or Separate Filing

State Statutory Tax Rate

Local Rate

Net Worth Tax

Property factor

Payroll factor

Sales factor6

Throw- back Rule

Sourcing of Services7

Section 199

Section 1799

NOL Carry- backs10

Bonus Depre-ciation11

Florida Orlando Separate 5.5% - - 25.0% 25.0% 50.0% No CoP Yes No No No Illinois1 Chicago Combined 7.3% - 0.10% 0.0% 0.0% 100.0% Yes MBS Yes Yes No No Indiana Indianapolis Separate 8.5% - - 10.0% 10.0% 80.0*_ Yes CoP No No Yes No Maryland Baltimore Separate 8.3% - - 25.0% 25.0% 50.0% No MBS No No Yes No Michigan2 Detroit Separate 6.0% - - 0.0% 0.0% 100.0% No MBS No Yes No No Minnesota Minneapolis Combined 9.8% - - 6.5% 6.5% 87.0*_ No MBS No No No No Missouri Kansas City Separate 6.3% 1.0% 0.03% 0.0% 0.0% 100.0% Yes CoP Yes Yes Yes Yes Missouri St. Louis Separate 6.3% 1.0 0.03% 0.0% 0.0% 100.0% Yes CoP Yes Yes Yes Yes New York Buffalo Combined 7.1% 0.0 0.15% 0.0% 0.0% 100.0% No MBS No Yes Yes No N. Carolina3 Charlotte Separate 7.1% 0.0 0.15% 25.0% 25.0% 50.0% No CoP No Yes No No Ohio4 Cleveland Combined 0.3% 2.0 - 20.0% 20.0% 60.0% No MBS n.a. n.a. n.a. n.a. Pennsylvania Pittsburgh Separate 10.0% - 0.29% 5.0% 5.0% 90.0% No CoP Yes Yes No No Tennessee Nashville Separate 6.5% - 0.25% 25.0% 25.0% 50.0% No CoP No Yes No No Texas5 Dallas Separate 1.0% - - 0.0% 0.0% 100.0% No MBS n.a. n.a. n.a. n.a. Wisconsin Milwaukee Combined 7.9% - - 0.0% 0.0% 100.0% Yes MBS No No No No Sources: CCH, RIA Checkpoint, state tax agencies Notes: 1Illinois' 7.3% income tax includes the personal property replacement tax. 2The Michigan Business Tax (MBT) consists of two parts: 1) Net income tax and 2) Modified gross receipts tax. The net income tax rate is 4.95%, while the gross receipts tax is 0.80%. A 21.99% surcharge is applied to the apportioned business income tax and gross receipts tax before credits, and is reflected in the effective tax rate of 6.04%. 3The statutory tax rate for North Carolina includes a 3% surcharge for years 2009 and 2010. Taxpayers must add back 85% of the amount allowed as a special accelerated depreciation deduction under Internal for property placed in service after December 31, 2007, but before January 1, 2010 but can later deduct the

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amount added back over a 5–year period. 4The statutory tax rate is Ohio's commercial activities tax (CAT), which is a tax on gross receipts. 5In lieu of a corporate income tax, Texas imposes a 1% gross margins tax on businesses. This rate is 0.5% for a taxable entity defined as a retailer or wholesaler. 6Figures with an asterisk (*) indicate that the state is phasing in a single sales factor. 7CoP stands for "cost of performance"; MBS is "market-based sales." 8Ohio and Texas do not have traditional corporate income taxes; they imposed modified gross receipts taxes. 9The following states have special rules related to Section 179: Minnesota and New York. 10The following states allow net operating loss (NOL) carrybacks for two years, rather than five years: Indiana, Maryland, Missouri, and New York. However, in New York eligible small businesses may temporarily elect an extended carryback period of up to five years for 2008 and 2009 NOLs, but all carrybacks are subject to a $10,000 limit. 11The following states have special rules related to bonus depreciation: Florida, Michigan, Minnesota, Missouri, New York, and North Carolina.

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B. Business Tax Credits Table 4 provides a summary of the major business tax credits available in the 15 locations. These are tax credits that are considered potentially important in affecting business expansion and new investment decisions. The credits are statutory credits available to any company meeting the credit requirements. The table does not include the potentially large, discretionary credits, such as Michigan’s MEGA credits, that are awarded on a case-by-case basis by economic development or other state agencies. Table 4A shows the credits available to all businesses, while Table 4B shows credits that are industry-specific. Research and development credits are available in most of the states, while capital investment and job creation credits are more limited, particularly for specific industries. Texas’ margin tax system provides job creation and capital investment credits to business through the Texas Enterprise Fund. The Texas credits are treated as statutory credits in this analysis.

Table 4A Statutory Business Tax Credits

State Capital

Investment Job Creation R&D Other Florida x x x x

Illinois x x x x

Indiana x x 10% of excess R&D expenses x

Maryland x x

3% of the R&D expenses that do not

exceed the state base amount and

10% excess expenses.

x

Michigan MEGA only x 1.90% of the R&D expenses.

Personal Property: 35% of property

taxes

Minnesota x x

10% of the first $250,000 in

increased costs; 5% of any additional increased costs.

x

Missouri Only for companies in development by the

end of 2004.

Expanding businesses: retain 100% of the

withholding tax of the new jobs. Length of credit depends on

wage levels.

x

High Impact businesses: 3% of the payroll of the

new jobs each year for five years; plus

Average Wage Bonus and Local New York x x x x

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Table 4A (cont’d)

Statutory Business Tax Credits

State Capital

Investment Job Creation R&D Other

North Carolina

Business Property: 7% to 3.5%, depending location; over four

years. Real Property: 30% of qualifying real

property costs if located in Tier 1; over

7 years.

$12,500 to $750, depending on location.

1.25% to 3.25%, depending on

amount of R&D expenses

x

Ohio x x

7% of the excess qualified research expenses over the past 3 year avg.

Pennsylvania x Negotiable credit of up to $1,000 per job.

10% of the excess of expenditures. x

Tennessee x $4,500 to $5,000 per job. No carryforward;

3-20 years. x x

Texas Texas Enterprise Fund Texas Enterprise Fund x

Designated projects are eligible to apply for state sales and use tax refunds on

qualified expenditures. Level

and amount is related to the

capital investment and jobs created at

Wisconsin Max 3% of eligible

equipment and 5% of eligible real property.

$3,000 to $7,000, depending on wage

levels.

5% of inc. R&D expenses; 5% of

qualifying expenditures on

tangible depreciable research facility

property. Supercredit if

qualified expenses exceed 125% of

Employee Training: max 50% of eligible

training costs.

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Table 4B

Industry-Specific Business Tax Credits

State

Capital Investment Job Creation R&D Other

Florida

Information, HQ: 5% of qualifying

investment; 20 years.

Manuf: $3,000-$5000 per new job, rewarded

as a tax refund. x x

Indiana

Manuf: up to 10%, limited to increase in tax over base year or

last year credit is claimed

x x HQ relocation: 50% of relocation costs;

Michigan

Manuf., R&D (MEGA): Up to the tax rate times the new payroll related to the expansion, plus

the taxpayer’s liability related to the expansion site; up to 20 years.

x x

Missouri

x

Technology: 5% of payroll of new jobs for

five years, plus avg. wage bonus

x x

New York

Manuf. and HQ: 5% of the first

$350,000,000 in qualifying

expenditures; 4% of any other.

Manuf. and HQ:1.5 to 2.5% of expenditures x x

Ohio

Manuf. and HQ: % of the IIT withholdings of the employees, not to exceed 75% for up to

15 years.

x x

Tennessee

Industrial Machinery Tax Credit: from 1% to

10% of qualifying investments, depending on

investment amounts

x x

HQ: relocation expenses, capped between $10,000 to $50,000 per job depending on the

number of jobs created. Also a sales

tax credit, for certain projects.

Wisconsin x x

Corporate HQ: $4,000 to $10,000, depending on wage

levels.

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C. Property Tax The property tax accounted for over 46% of combined state and local business taxes in Wisconsin (vs. 36% on average in the U.S.) in FY2009. In estimating the property taxes on new investments in the business competitiveness analysis, EY uses effective tax rates. The effective property tax rates equal the statutory tax rates multiplied by the assessment ratio and the sales ratio, if available for a state. These adjustments to statutory tax rates provide a more accurate estimate of the effective tax rates (property taxes divided by market value of property) in each location. Table 5 presents the effective tax rates by type of property for both commercial and industrial property. The features are presented for both commercial and industrial property. The table also indicates where categories of property are exempt from tax. Milwaukee joins six other states in exempting industrial machinery and equipment from the property tax.

Table 5 Effective Property Tax Rates, Taxable Year 2008

Commercial Industrial

State City Real

Property Machinery & Equip.

Other TPP

Motor Vehicles

Real Property

Machinery & Equip.

Other TPP

Motor Vehicles

FL Orlando 1.7% 1.9% 1.9% exempt 1.7% 1.9% 1.9% exempt IL Chicago 2.4 exempt exempt exempt 2.8 exempt exempt exempt IN Indianapolis 2.6 2.8 2.8 exempt 2.7 2.8 2.8 exempt MD Baltimore 2.0 5.7 5.7 exempt 2.0 exempt 5.7 exempt MI Detroit 4.1 3.5 3.5 exempt 4.1 1.9 3.0 exempt MN Minneapolis 3.3 exempt exempt exempt 3.3 exempt exempt exempt MO Kansas City 3.0 2.6 2.6 2.6 3.0 2.6 2.6 2.6 MO St. Louis 2.7 2.3 2.3 2.2 2.7 2.3 2.3 2.2 NY Buffalo 3.9 exempt exempt exempt 3.9 exempt exempt exempt NC Charlotte 1.1 1.3 1.3 1.3 1.1 1.3 1.3 1.3 OH Cleveland 2.5 exempt exempt exempt 2.7 exempt exempt exempt PA Pittsburgh 2.6 exempt exempt exempt 2.6 exempt exempt exempt TN Nashville 1.7 1.2 1.2 4.1 1.7 1.2 1.2 4.1 TX Dallas 2.3 2.6 2.6 exempt 2.6 2.6 2.6 exempt WI Milwaukee 2.3 2.3 2.3 exempt 2.3 exempt 2.3 exempt

Source: Minnesota Taxpayer Association, 50-State Property Tax Comparison Study, June 2009. An additional feature of Milwaukee’s property tax system should be noted: residential property faces significantly higher property taxes than commercial or industrial property. According to the most recent 50-state property tax report prepared by the Minnesota Taxpayers Association, the effective tax rate on residential property was 6th highest for the largest city in each state. In contrast, the commercial tax rate was

13

19th highest and the industrial rate was 38th highest.3 One implication of the relatively higher property taxes on residential property is that employees of Milwaukee companies may view Milwaukee as a relatively high-tax location, even if business property taxes are more competitive. D. Unemployment Insurance Tax Unemployment tax collections depend upon the taxable wage base and the tax rate schedule that applies to a specific employer. Table 6 describes the tax rates and tax bases that apply in each location. The tax rates are the “average” state rates that applied in 2006 and 2009. The 2006 rates may be viewed as the rates applicable during an economic expansion; the 2009 rates were beginning to be affected by the recession that began in December 2007. Compared to the 14 locations, Wisconsin’s unemployment tax effective tax rate was close to average.

Table 6 Unemployment Insurance Tax Parameters

State 2010 Taxable

Wage Base Rates

Indexed

Average State Rates

2006 2009 Florida $7,000 No 2.00% 1.51% Illinois 12,520 No 4.60 2.54 Indiana 7,000 No 3.00 2.62 Maryland 8,500 No 2.30 1.97 Michigan 9,000 No 4.60 4.57 Minnesota 27,000 Yes 1.80 1.50 Missouri 13,000 No 2.20 2.05 New York 8,500 No 4.00 3.68 North Carolina 19,700 Yes 2.00 1.71 Ohio 9,000 No 2.60 2.69 Pennsylvania 8,000 No 5.40 4.63 Tennessee 9,000 No 1.90 2.90 Texas 9,000 No 2.30 1.26 Wisconsin $12,000 No 2.90% 2.59%

Source: U.S. Department of Labor Note: Tax rates are annualized 2006:Q4 and 2009: Q4 data

3Minnesota Taxpayer Association, 50-State Property Tax Comparison Study: Payable Year 2008, June 2009. The

effective property tax rates are those reported for the highest value residential, commercial or industrial property examples presented in the study.

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E. Sales Tax on Business Input Purchases Table 7 provides summary measures of the taxability of business inputs under the sales tax, for the four industries that will be analyzed in more detail in this study: 1) management of companies; 2) securities, commodities, contracts and investments; 3) data processing services; and 4) industrial machinery. The percentages in the table were estimated from EY’s 50-state sales tax model. The figures in the table show what percentage of the estimated total input purchases (both capital and operating purchases) in each state are subject to the sales and use tax. The estimates suggest that Wisconsin applies the business sales tax to a smaller portion of total purchases than in the comparison states. However, the estimates also show that the sales tax, which in theory should only apply to final sales to households, applies to a large portion of business input purchases. The Milwaukee location differs from the comparison locations in the level of combined state and local statutory sales tax rates. The statutory rate in Milwaukee (5.5%) is more than 21% below the average for all locations. While the sales tax paid on business input purchases may be less visible than property taxes or corporate income taxes, they can have a significant impact on relative business tax burdens.

Table 7 Taxability of Business Purchases Subject to Sales Tax

Operating inputs Capital investments

State Mgmt of

Companies

Securities, commodity contracts,

investments

Data processing

services Industrial machinery

Mgmt of Companies

Securities, commodity contracts,

investments

Data processing

services Industrial machinery

FL 16% 1% 37% 4% 61% 59% 50% 15% IL 12 1 31 2 67 61 67 19 IN 13 2 38 2 57 59 33 15 MD 17 3 43 4 78 74 75 28 MI 15 1 36 2 74 74 58 23 MN 17 2 38 2 74 74 58 23 MO 18 3 42 4 78 74 75 23 NY 18 3 42 4 74 74 58 23 NC 17 2 40 4 66 65 54 26 OH 15 2 40 5 48 43 13 20 PA 24 3 46 4 57 59 33 20 TN 13 1 35 2 69 65 71 24 TX 13 1 34 2 66 65 54 24 WI 17% 1% 36% 7% 61% 59% 50% 21%

Source: Commerce Clearing House; EY calculations.

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F. Individual Income Taxes Table 8 compares the individual income tax parameters in the 15 cities selected for this study. Wisconsin’s individual income tax rate range is in line with the range in states presented in the table. New York, Minnesota and the cities of Baltimore and Cleveland have higher maximum tax rates than Wisconsin; Missouri and North Carolina have similar ranges. Florida and Texas do not have an individual income tax.

Table 8

Individual Income Tax Parameters

State City

Range of Tax Rates Personal Exemptions

Standard Deduction

Federal Income

Tax Deductible

Taxable Starting

Point

Earned Income Credit State City Single Married

Dependent

FL Orlando n.a.% n.a. n.a. n.a. n.a. n.a. n.a. n.a. % IL Chicago 3.00% $2,000 $4,000 $2,000 0 No Fed AGI 5%5 IN Indianapolis 3.00% 1,000 2,000 1,000 0 No Fed AGI 0%5 MD Baltimore 2-6.25% 3.05% 2,400 4,800 2,400 1,500-4,000 No Fed AGI 25%5 MI Detroit 4.00% 2.50% 3,300 6,600 3,300 0 No Fed AGI 20%5 MN Minneapolis 5.35-

7.85% 3,650 7,300 3,650 5,700-

11,4002 No Fed tax.inc. 22-46%5

MO Kansas City 1.5-6.00% 1.00% 2,100 4,200 1,200 5,700-11,400 Yes3 Fed AGI 0%5 MO St. Louis 1.5-6.00% 1.00% 2,100 4,200 1,200 5,700-11,400 Yes3 Fed AGI 0%5 NY Buffalo 4.5-8.97% 0 0 1,000 7,500-15,000 No Fed AGI 30%5 NC Charlotte 6-7.75% 3,650 7,300 3,650 3,000-6,0002 No Fed tax.

inc. 5%5

OH Cleveland .62-6.24% 2.00% 1,550 3,100 1,550 0 No Fed AGI 0%5 PA Pittsburgh 3.00 % 3.00% - - - 0 No State tax.

inc. 0%5

TN Nashville 6.001% n.a. n.a. n.a. 0 No n.a. 0%5 TX Dallas n.a.% n.a. n.a. n.a. n.a. n.a. n.a. n.a. % WI Milwaukee 4.6-7.75% 700 1,400 700 7,520-15,830 No Fed AGI 4-436%

Sources: Federal Tax Administrators (FTA); Checkpoint for Detroit, Kansas City Revenue Dept., St. Louis Revenue Dept., Cleveland Central Collection Agency, and Pittsburgh Dept. of Finance Notes: 2010 Rates. See appendix for tax rate schedule details by state 1 State income tax is limited to dividends and interest income only 2 These states allow personal exemption or standard deductions as provided in the IRC. 3 Deduction is limited to $10,000 for joint returns and $5,000 for individuals 4 See Minnesota Working Family Credit (WFC) Table (Schedule M1WFC) 5 4% for 1 child; 14% for 2; 43% for 3+ children

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Wisconsin’s standard deduction is higher than every location except for New York. This provides relatively lower effective tax rates for lower-income individuals. Missouri is the only state that allows deductions for federal income taxes paid, and allows up to $10,000 for joint returns and $5,000 for individuals. The taxable income starting point, federal adjusted gross income, is standard across most states. The last column in Table 8 shows whether a state offers a refundable earned income credit. Wisconsin’s earned income tax credit ranges from 4% of the federal EIC for taxpayers with one qualifying child up to 43% of the federal EIC for taxpayers with three qualifying children. For taxpayers with one qualifying child, Wisconsin’s rate is lower than any other state that offers the credit. Conversely, with three qualifying children Wisconsin’s rate is higher than any other state except for Minnesota, who offers a slightly higher credit for those which qualify for their highest EIC rate of 46%. The combined impact of the tax rate, tax base and credit provisions on effective tax rates (actual taxes divided by gross income) is not evident from looking at the statutory tax features in each location. The following two tables provide estimates of these effective tax rates from two different studies. Table 9 presents the results of the Government of the District of Columbia’s latest (September 2009) state-by-state comparison of state and local tax rates and tax burdens for the 2008 tax year.4 The D.C. study calculates the tax burdens and effective tax rates in the largest city in each state.5 The tax burden is stated as an effective tax rate, the percentage of total income that must be paid in individual income taxes. Tax burdens and effective tax rates are estimated for a hypothetical family of three at three different annual income levels: $25,000, $75,000, and $150,000. The family with an annual income of $25,000 has no tax liability in Wisconsin. Wisconsin has a relatively average income tax burden for the families in the $75,000 and $150,000 income ranges. However, the income range used in the D.C. study does not provide information on the distributional impact of individual income taxes for higher-income taxpayers.

4 “Tax Rates and Tax Burdens in the District of Columbia: A Nationwide Comparison” September 2009.

5 The largest cities included in the D.C. study coincide with the cities selected by MMAC, except for Orlando

(Jacksonville is the largest city), St. Louis (Kansas City), Buffalo (New York City), Cleveland (Columbus), Pittsburgh (Philadelphia), Nashville (Memphis), and Dallas (Houston).

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Table 9

Personal Income Tax Burdens for the Largest City in Each State, for Family of 3 at Different Household Income Levels6

$25,000 $75,000 $150,000

State Income

Tax % Burden State

Income Tax % Burden

State Income

Tax % Burden

Pennsylvania 1,769 7.1% Pennsylvania 5,286 7.0% New York 11,604 7.7% Indiana 787 3.1% Michigan 4,610 6.1% Pennsylvania 10,501 7.0% Ohio 751 3.0% Maryland 3,627 4.8% Michigan 9,747 6.5% Michigan 582 2.3% Ohio 3,492 4.7% Maryland 9,405 6.3% North Carolina 518 2.1% Indiana 2,992 4.0% Ohio 8,898 5.9% Illinois 474 1.9% North Carolina 2,958 3.9% North Carolina 8,385 5.6% Missouri 465 1.9% Wisconsin 2,866 3.8% Wisconsin 7,748 5.2% Maryland 0 0% New York 2,685 3.6% Minnesota 7,346 4.9% Minnesota 0 0% Missouri 2,670 3.6% Missouri 7,070 4.7% New York 0 0% Minnesota 2,248 3.0% Indiana 6,292 4.2% Tennessee 0 0% Illinois 1,870 2.5% Illinois 4,046 2.7% Wisconsin 0 0% Tennessee 0 0% Tennessee 221 .1% Florida n.a. n.a. ) Florida n.a. n.a.) Florida n.a. n.a.) Texas n.a. n.a. ) Texas n.a. n.a.) Texas n.a. n.a.) Simple average 764 1.8% Simple average 3,209 3.9% Simple average 7,605 5.1%

Source: Government of the District of Columbia, Tax Rate and Tax Burdens 2008, September 2009. Table 10 presents estimates of effective individual income tax rates by state for a broader range of incomes. The estimates are from a recent study (November 2009) by the Institute on Taxation & Economic Policy. The table shows estimated individual income tax burdens (in terms of total aggregate tax amounts) by household income percentiles.7 It shows that Wisconsin’s effective individual income tax rates exceed the simple average in each group for the comparison states. Wisconsin also has a relatively large difference between the effective tax rates in higher percentiles (80th to 95th percentiles) and in the first quintile of households. Figure 1 shows the difference in effective tax rates for taxpayers in the higher income 6 Tax burdens are compared for a hypothetical family that consists of two wage-earning spouses and one school-age

child. The wage and salary split is assumed to be 70-30 between the two spouses. All wage and salary income is further assumed to have been earned in the city. All other income is assumed to be split evenly. The family at each income level is assumed to own a single family home and to reside within the confines of the city. However, at the $25,000 income level the study assumes that the household is a renter. 7 Institute on Taxation & Economic Policy, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States,

3rd Edition, November 2009.

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range compared to the lowest 20% of households. For example, the difference in these two effective tax rates is 4.7% in Wisconsin. Wisconsin (and Minnesota) rank behind only New York for the largest difference in effective individual income tax rates. Florida and Texas do not have individual income taxes.

Table 10 State and Local Individual Income Taxes,

Effective Tax Rates by Household Income Percentiles

80-100%

State 0-20% 20-40% 40-60% 60-80% 80-95% 95-99% 99-100%

Difference between

80th-95th and 0-20th

percentiles New York -3.5% 0.3% 3.4% 4.6% 5.7% 6.6% 6.7% 9.2% Wisconsin -0.1% 2.2% 3.5% 4.1% 4.6% 4.6% 5.2% 4.7% Minnesota -0.3% 2.1% 3.0% 3.7% 4.4% 4.9% 5.4% 4.7% North Carolina 0.9% 2.4% 3.3% 4.0% %4.7% 5.1% 5.6% 3.8% Michigan -0.3% 1.7% 2.7% 3.1% 3.2% 3.3% 3.1% 3.5% Missouri 0.8% 2.1% 2.8% 3.3% 3.7% 4.0% %4.3% 2.9% Ohio 1.5% 2.7% 3.4% 3.9% 4.4% 4.6% 5.0% 2.9% Indiana 2.0% 3.0% 3.5% 3.6% 3.8% 3.5% 3.4% 1.8% Pennsylvania 1.6% 2.6% 2.9% 3.1% 3.1% 2.9% 2.5% 1.5% Illinois 1.2% 1.9% 2.2% 2.3% 2.3% 2.3% 2.2% 1.1% Tennessee 0.0% 0.0% 0.0% 0.0% 0.0% 0.1% 0.4% 0.0% Florida n.a.& n.a.& n.a.& n.a.& n.a.& n.a.& n.a.& n.a.& Texas n.a.& n.a.& n.a.& n.a.& n.a.& n.a.& n.a.& n.a.& Simple average 0.4% 2.0% 2.9% 3.4% 3.8% 4.0% 4.1% 3.4%

Source: Institute on Taxation and Economic Policy, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, November 2009.

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Figure 1

Progressivity of Individual Income Taxes by State,

Source: Institute on Taxation and Economic Policy, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, November 2009. (Data from Table 10). Who Bears the Burden of Wisconsin Business Tax Increases? This section provides a different perspective on Wisconsin’s business tax competitiveness. It looks at the expected additional state and local taxes imposed on a new business investment in each of the selected states. As legislators consider possible tax increases to close current budget gaps, the debate often focuses on the balance of tax changes between households and businesses, often stated as a question: “Are businesses paying their fair share of taxes?” However, regardless of the initial distribution of legal business tax liabilities, the more important policy question is who ultimately bears the burden of business tax increases in terms of reductions in income or higher prices for goods and services. This section provides initial estimates of who is expected to bear the burden of state business tax increases or benefits from business tax reductions. Initial business tax increases are ultimately redistributed from business taxpayers to households after market prices and output levels adjust to the higher taxes. The final burden distribution, after changes in behavior of workers, investors and consumers shift the initial legal liabilities to households, is the “economic incidence” of the business tax increase. This information is important in understanding both the

20

distributional impacts of business tax changes and the potential impact of tax increases on a state’s competitiveness. As a state increases its business taxes (relative to other states), the after-tax rate of return on capital investment in the state is reduced. Because capital is mobile across borders, less capital will be invested in the state, wages to in-state workers will decrease and prices of goods and services charged to in-state residents will increase. The real incomes of residents will be reduced by both the reduction in income and the increase in local prices.8 The adjustment process ends when the after-tax rate of return on capital investments is restored to the level prior to the tax increase. Table 11 provides state-by-state estimates of the economic incidence of a proportionate increase in state and local business taxes in each state, holding taxes in all other states constant. For each state, the table shows the estimated percentage of a business tax increase that is ultimately shifted to state residents in the form of lower wages or higher prices, both of which reduce residents’ real spendable income.9 The states are ranked from highest to lowest percentage of the burden borne by in-state residents (as consumers and workers). The rankings show that Wisconsin is ranked 12th highest among all the states in terms of the percentage of a business tax increase that is expected to be borne by state residents in lower spendable income through either higher prices for consumer purchases or lower wages and salaries. The Wisconsin percentage (80%) is almost 7% above the U.S. average. For the comparison locations used in this study, Wisconsin’s percentage is tied with Florida and is higher than 10 other comparison states. This tax “incidence” measure indicates that, in the long run, Wisconsin business tax increases fall primarily on state residents through a combination of higher prices of consumer purchases and lower incomes. The important policy insight is that any debate over Wisconsin business tax changes is, fundamentally, a debate over changes in real, spendable incomes for Wisconsin residents. Because states are open-border economies, the largest share of a business

8 The economic responses to tax increases will vary by industry, depending on several factors: whether goods and

services are sold in national or local markets, how high total state and local business taxes are relative to taxes in other states, on the composition of state and local business taxes and how mobile capital and labor is among the states. The key variable in determining the economic incidence of business tax changes is the overall business tax rate in a state compared to the average in all other states. 9 The estimates were derived from an across-the-board ten percent increase in all state and local business taxes.

Estimates of the state and local taxes that are legal liabilities of businesses are derived from EY’s 50-State Business Tax study. The methodology used to estimate the economic incidence is explained in detail in Robert Cline, Andrew Phillips, Joo Mi Kim and Tom Neubig, “The Economic Incidence of Additional State Business Taxes,” State Tax Notes, January 11, 2010, pp. 105-126. The remaining portion of the tax increase is borne by lower incomes of capital owners or exported to nonresidents through higher prices.

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tax increase (or decrease) will be shifted to Wisconsin residents through lower (or higher) spendable income.

Table 11 Economic Incidence of a Proportionate Increase in State and Local Business Taxes,

by State

Relative to Relative to Rank State Percent U.S. Average Rank State Percent U.S. Average

1 Hawaii 85.9% 115% 27 Minnesota 76.2% 102%2 District of Columbia 84.0% 112% 28 Nebraska 75.9% 101%3 Maine 83.0% 111% 29 Illinois 75.9% 101%4 Tennessee 83.0% 111% 30 Arkansas 75.6% 101%5 New Jersey 82.2% 110% 31 Alabama 75.1% 100%6 Washington 81.0% 108% 32 Kansas 75.1% 100%7 Nevada 80.5% 107% 33 Mississippi 75.0% 100%8 Rhode Island 80.4% 107% 34 Virginia 74.7% 100%9 Florida 80.3% 107% 35 Utah 73.9% 99%

10 Colorado 80.1% 107% 36 North Carolina 72.8% 97%11 Massachusetts 80.0% 107% 37 Oregon 72.4% 97%12 Wisconsin 80.0% 107% 38 Idaho 72.0% 96%13 Missouri 79.1% 106% 39 Kentucky 71.5% 95%14 Georgia 79.0% 105% 40 Iowa 71.0% 95%15 Connecticut 78.5% 105% 41 West Virginia 64.8% 87%16 Ohio 78.5% 105% 42 South Dakota 64.7% 86%17 South Carolina 78.5% 105% 43 Texas 62.5% 84%18 Maryland 78.2% 104% 44 Montana 60.8% 81%19 California 77.9% 104% 45 Oklahoma 60.0% 80%20 Pennsylvania 77.8% 104% 46 North Dakota 58.0% 78%21 Arizona 77.6% 104% 47 Delaware 57.2% 76%22 Indiana 77.6% 104% 48 Louisiana 49.9% 67%23 New York 77.2% 103% 49 New Mexico 46.5% 62%24 New Hampshire 76.9% 103% 50 Alaska 36.9% 49%25 Vermont 76.9% 103% 51 Wyoming 36.8% 49%26 Michigan 76.8% 103% United States 75.0% 100%

Resident Tax Burdens Resident Tax Burdens

Source: Robert Cline, Andrew Phillips, Joo Mi Kim and Tom Neubig, “The Economic Incidence of Additional State Business Taxes,” State Tax Notes, January 11, 2010, pp. 105-126.

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II. Business Tax Competitiveness Overview This section of the report presents estimates of the state and local business taxes that would be paid on an investment in a new or expanded facility in each location of the selected 15 locations for representative firms in four industries. The representative industries are industrial machinery manufacturing, information technology, financial funds management, and the corporation management offices. (See Appendix A for a more detailed description of the industries.) The EY business tax competitiveness model (BTCM) was used to estimate the effective state and local tax rates imposed on the tax bases generated by a new or expanded investment in each location. The BTCM is a tax simulation model that incorporates the statutory tax features for each of the major state and local business taxes in each location. State and local taxes included in the calculations are corporate income taxes, corporate franchise taxes, sales and use taxes on business input purchases, and property taxes.10 In addition to these taxes, the model also includes estimates of statutory tax credits that are available to each firm, including investment tax credits, job credits and research and development credits. The credit calculations do not include credits that are negotiated on a case-by-case basis. The BTCM provides comprehensive estimates of additional state and local business taxes paid as a direct result of the new investment at each location. Firm financial profiles (balance sheets and income statements) are used to estimate the tax bases for the representative firms in each location. Features of federal, state, and local tax systems are programmed into the model. State and local taxes are calculated over a 30-year investment horizon to recognize differences in tax provisions over time. The tax results from the BTCM are summarized as effective tax rates (ETRs) for each tax type and for combined state and local business taxes in each location; results are presented for each of the four industries. ETRs are calculated as the percentage reduction in the before-tax rate of return on each investment. For example, an ETR of 5.0% indicates that state and local taxes reduce the before-tax return by 5%. Milwaukee’s business tax competitiveness is measured by ETRs before credits. The impact of statutory credits is discussed in the last section of the analysis. The following tables and charts present estimates of the state and local tax burdens paid by representative businesses expanding in Milwaukee and 14 other locations. The results are reported as ETRs measured as the percentage reduction in the pre-tax, rate-of-return on the investments (ROI). For example, a 5% ETR indicates that state

10

Sales and use taxes collected from customers by the representative firm are not included as business taxes.

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and local business taxes reduce the pre-tax ROI by 5%, as measured over a 30-year time period. Results are presented for hypothetical firms in four industries: industrial machinery manufacturing, information technology, financial funds management and management offices. ETRs vary by industry due to differences in the composition of income statements and balance sheets across industries that affect tax bases. Comparison Across Industries Table 12 summarizes the results of the competitiveness analysis. The fifteen locations are ranked by overall state and local business tax ETRs for each of the four industries. The overall state and local business tax ETR in Milwaukee for industrial manufacturing is 15.6% below the average for all 15 locations. The relatively low overall ETR reflects property tax exemptions for tangible property used in manufacturing, a relatively low property tax rate, significant sales tax exemptions on machinery and equipment purchases, and the favorable impact of single sales factor apportionment for the corporate income tax. For the industrial machinery manufacturing example, Milwaukee is ranked 13th

highest. However, Milwaukee’s overall ETR is closer to competitor states than suggested by the rankings. Milwaukee’s overall ETR (5.4%) is very close to the average rate (5.5%) for the nine lowest ranked locations. This group is significantly below the ETRs for the group of six states that have significantly higher effective tax rates (average of 7.8%). The estimates show that the average ETRs are being pulled up by four locations (Charlotte, Nashville, Detroit and Baltimore) with significantly higher state and local business taxes. Milwaukee is ranked 14th in overall ETR for information technology, 20% below the 15-location average. Milwaukee’s ETRs for financial funds management and management offices are also below average. The management offices example is 15.6% below the average for the comparison states, while the financial funds management example is 14.2% below the average. The ETR rankings for the other three industries also show that Milwaukee’s ETRs are similar to the tax rates in the second tier of 6 to 8 other states with below-average ETRs. In other words, the average ETR in all of the industries are being pulled up by significantly higher tax rates in 4 or 5 states included in the analysis. While lower than the top tier states, Milwaukee’s ETRs are in line with the ETRs for the next lower tier of locations. State vs. Local Business Tax Burdens Table 13 presents state and local business ERSs for state taxes and for local taxes, primarily the property tax. The figures show that Milwaukee’s local business tax burden ranking is generally lower than the state tax ranking. This is due to the relatively low Milwaukee property taxes on commercial and industrial property.

24

Table 12

Total Effective Business Tax Rates and Rankings among Comparison States, by Industry and Location

Industrial Machinery

Manufacturing Information Technology Financial Funds Management Management Offices

Location ETR

Location ETR

Location ETR

Location ETR Charlotte, NN 8.4%

Baltimore, Maryland 15.9%


Nashville, Tennessee 5.3%




Pittsburgh, PA 5.1% Detroit, Michigan 8.1%

Charlotte, NC 14.3%

Pittsburgh, PA 5.7%



Detroit, Michigan 12.2%

Charlotte, NC 5.6%

Charlotte, NC 5.0% Pittsburgh, PA 7.3%

Pittsburgh, PA 11.6%

Minneapolis, MN 4.8%


Minneapolis, Minnesota 6.9%

St. Louis, Missouri 11.5%


Orlando, Florida 3.4% Kansas City, Missouri 6.0%


Buffalo, New York 4.3%


Orlando, Florida 5.8%

Chicago, Illinois 11.2%


Chicago, Illinois 2.8% St. Louis, Missouri 5.7%



Milwaukee, WI 2.7%

Indianapolis, Indiana 5.6%



Indianapolis, Indiana 2.6% Buffalo, New York 5.6%

Kansas City, MO 10.6%

Milwaukee, WI 3.6%




Kansas City, Missouri 3.5%

Kansas City, Missouri 2.4% Milwaukee, WI 5.4%

Dallas, Texas 10.0%



Dallas, Texas 5.2%

Milwaukee, WI 9.4%

Cleveland, Ohio 2.6%

Cleveland, Ohio 1.3% Cleveland, Ohio 4.8%

Cleveland, Ohio 9.1%

Dallas, Texas 1.8%

Dallas, Texas 0.7%

15-Location Average 6.4% 15-Location Average 11.7% 15-Location Average 4.2% 15-Location Average 3.2%

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Table 13 State and Local Effective Business Tax Rates and Rankings, by Industry and Location


Manufacturing

Information Technology

Financial Funds Management

Management Offices

State City ETR Rank ETR Rank ETR Rank ETR Rank A. Total State and Local Taxes FL Orlando 5.8% 8 10.9% 10 4.1% 8 3.4% 6 IL Chicago 5.6% 12 11.2% 8 3.7% 9 2.8% 8 IN Indianapolis 5.6% 10 10.6% 12 3.6% 10 2.6% 10 MD Baltimore 7.8% 4 15.9% 1 5.9% 1 5.0% 3 MI Detroit 8.1% 3 12.2% 4 4.4% 6 2.3% 13 MN Minneapolis 6.9% 6 11.3% 7 4.8% 5 3.4% 5 MO Kansas City 6.0% 7 10.6% 11 3.5% 12 2.4% 12 MO St. Louis 5.7% 9 11.5% 6 3.5% 13 2.5% 11 NY Buffalo 5.6% 11 11.1% 9 4.3% 7 3.2% 7 NC Charlotte 8.4% 1 14.3% 3 5.6% 4 5.0% 4 OH Cleveland 4.8% 15 9.1% 15 2.6% 14 1.3% 14 PA Pittsburgh 7.3% 5 11.6% 5 5.7% 3 5.1% 2 TN Nashville 8.2% 2 15.6% 2 5.8% 2 5.3% 1 TX Dallas 5.2% 14 10.0% 13 1.8% 15 0.7% 15 WI Milwaukee 5.4% 13 9.4% 14 3.6% 11 2.7% 9

B. Total State Taxes FL Orlando 4.3% 7 8.8% 7 3.5% 6 3.3% 5

IL Chicago 4.3% 10 8.1% 9 2.9% 9 2.6% 8 IN Indianapolis 3.5% 13 8.2% 8 2.9% 11 2.4% 10 MD Baltimore 6.5% 3 11.6% 2 5.3% 1 4.9% 4 MI Detroit 5.7% 6 8.9% 6 3.1% 7 2.1% 11 MN Minneapolis 5.7% 5 10.0% 5 3.8% 5 3.2% 6 MO Kansas City 3.6% 12 6.7% 14 2.3% 13 2.0% 13 MO St. Louis 3.6% 11 6.7% 13 2.3% 12 2.0% 12 NY Buffalo 4.3% 8 7.1% 10 3.0% 8 2.9% 7 NC Charlotte 7.2% 1 11.2% 3 5.1% 3 4.9% 3 OH Cleveland 2.7% 15 6.3% 15 0.7% 15 0.2% 15 PA Pittsburgh 6.3% 4 10.2% 4 4.9% 4 4.9% 2 TN Nashville 6.7% 2 12.2% 1 5.2% 2 5.2% 1 TX Dallas 3.0% 14 6.9% 12 1.1% 14 0.5% 14 WI Milwaukee 4.3% 9 6.9% 11 2.9% 10 2.5% 9

C. Total Local Taxes FL Orlando 1.5% 8 2.1% 13 0.6% 14 0.1% 14

IL Chicago 1.3% 10 3.1% 7 0.9% 7 0.2% 7 IN Indianapolis 2.1% 4 2.4% 12 0.8% 9 0.2% 9 MD Baltimore 1.4% 9 4.1% 2 0.6% 13 0.2% 11 MI Detroit 2.4% 2 3.3% 6 1.2% 4 0.3% 5 MN Minneapolis 1.2% 12 1.3% 15 1.0% 6 0.2% 6 MO Kansas City 2.4% 1 3.9% 4 1.3% 3 0.5% 3 MO St. Louis 2.1% 5 4.7% 1 1.2% 5 0.5% 2 NY Buffalo 1.3% 11 3.9% 3 1.3% 2 0.3% 4 NC Charlotte 1.2% 13 3.1% 9 0.5% 15 0.1% 15 OH Cleveland 2.0% 6 2.8% 10 1.9% 1 1.2% 1 PA Pittsburgh 1.0% 15 1.4% 14 0.8% 8 0.2% 10 TN Nashville 1.5% 7 3.4% 5 0.6% 12 0.1% 13 TX Dallas 2.3% 3 3.1% 8 0.7% 10 0.2% 8 WI Milwaukee 1.1% 14 2.4% 11 0.7% 11 0.2% 12

26

Composition of Business Tax Rates by Type of Tax Table 14 compares the ETRs by industry and location for each of the major state and local tax types. This information can be used to identify the relative size of the different types of tax burdens for each industry. The figures clearly show that different tax types account for different shares of the overall state and local tax burdens in Milwaukee. Corporate income taxes account for a much larger share of business taxes for financial funds management and management offices. This partly reflects the operation of the single sales factor apportionment formula. These two industries are assumed to have a larger percentage of their sales within the state compared to the other two industries. For information technology, sales taxes on business inputs account for the largest share of the business tax burden, while unemployment taxes account for the largest percentage of business taxes for industrial machinery manufacturing. Because different tax types account for different shares of the combined state and local tax burdens for the selected industries, business tax reform in Wisconsin will likely involve a package of changes affecting multiple business taxes. Figures 2 and 3 provide graphs of the ETRs by industry (figures a through d) for both combined state and local business taxes (Figure 2) and state business taxes only (Figure 3).

27

Table 14 Summary of Effective Business Tax Rates, by Tax Type and Location

Industrial

Manufacturing Information Technology

Financial Management

Management Offices

State City ETR Rank ETR Rank ETR Rank ETR Rank A. Total State and Local Taxes FL Orlando 5.8% 8 10.9% 10 4.1% 8 3.4% 6 IL Chicago 5.6% 12 11.2% 8 3.7% 9 2.8% 8 IN Indianapolis 5.6% 10 10.6% 12 3.6% 10 2.6% 10 MD Baltimore 7.8% 4 15.9% 1 5.9% 1 5.0% 3 MI Detroit 8.1% 3 12.2% 4 4.4% 6 2.3% 13 MN Minneapolis 6.9% 6 11.3% 7 4.8% 5 3.4% 5 MO Kansas City 6.0% 7 10.6% 11 3.5% 12 2.4% 12 MO St. Louis 5.7% 9 11.5% 6 3.5% 13 2.5% 11 NY Buffalo 5.6% 11 11.1% 9 4.3% 7 3.2% 7 NC Charlotte 8.4% 1 14.3% 3 5.6% 4 5.0% 4 OH Cleveland 4.8% 15 9.1% 15 2.6% 14 1.3% 14 PA Pittsburgh 7.3% 5 11.6% 5 5.7% 3 5.1% 2 TN Nashville 8.2% 2 15.6% 2 5.8% 2 5.3% 1 TX Dallas 5.2% 14 10.0% 13 1.8% 15 0.7% 15 WI Milwaukee 5.4% 13 9.4% 14 3.6% 11 2.7% 9 B. State and Local Sales Tax FL Orlando 0.9% 10 6.0% 11 0.3% 13 0.1% 10 IL Chicago 1.2% 5 8.0% 2 0.5% 3 0.2% 4 IN Indianapolis 0.8% 12 6.1% 10 0.4% 9 0.1% 13 MD Baltimore 1.2% 4 6.8% 7 0.4% 8 0.1% 9 MI Detroit 0.9% 11 5.6% 14 0.3% 14 0.1% 11 MN Minneapolis 1.2% 7 7.1% 4 0.4% 6 0.2% 3 MO Kansas City 0.8% 13 5.9% 12 0.4% 12 0.1% 12 MO St. Louis 0.8% 13 7.0% 6 0.4% 7 0.2% 7 NY Buffalo 0.7% 15 7.1% 5 0.4% 5 0.2% 6 NC Charlotte 1.4% 3 7.6% 3 0.5% 1 0.2% 8 OH Cleveland 1.2% 6 6.6% 9 0.5% 4 0.2% 1 PA Pittsburgh 1.0% 8 5.8% 13 0.4% 11 0.1% 14 TN Nashville 1.5% 2 8.6% 1 0.5% 2 0.2% 2 TX Dallas 1.7% 1 6.6% 8 0.4% 10 0.2% 5 WI Milwaukee 0.9% 9 4.9% 15 0.3% 15 0.1% 15 C. State and Local Corporate Income Tax FL Orlando 2.8% 4 2.9% 4 3.1% 5 3.1% 5 IL Chicago 1.3% 10 1.3% 10 2.0% 10 2.0% 9 IN Indianapolis 1.6% 8 1.6% 9 2.3% 9 2.3% 8 MD Baltimore 4.3% 1 4.4% 1 4.7% 1 4.7% 1 MI Detroit 2.4% 6 2.2% 7 2.5% 7 1.9% 11 MN Minneapolis 2.3% 7 2.2% 6 3.1% 6 3.1% 6 MO Kansas City 1.2% 12 1.3% 12 1.9% 12 1.9% 12 MO St. Louis 1.2% 12 1.3% 12 1.9% 12 1.9% 12 NY Buffalo 1.3% 11 1.3% 11 2.0% 11 2.0% 10 NC Charlotte 3.6% 2 3.7% 2 4.0% 2 3.9% 2 OH Cleveland 1.2% 14 1.2% 14 1.2% 14 1.0% 14 PA Pittsburgh 2.4% 5 2.5% 5 3.3% 4 3.2% 4 TN Nashville 3.4% 3 3.4% 3 3.7% 3 3.7% 3 TX Dallas 0.9% 15 0.8% 15 0.7% 15 0.3% 15 WI Milwaukee 1.6% 9 1.6% 8 2.4% 8 2.4% 7

28

Table 14 (cont.) Summary of Effective Business Tax Rates, by Tax Type and Location


Manufacturing Information Technology

Financial Funds

Management Management

Offices State City ETR Rank ETR Rank ETR Rank ETR Rank

D. Other State Taxes (unemployment insurance and corporate franchise taxes) FL Orlando 0.6% 15 0.3% 15 0.1% 15 0.0% 15 IL Chicago 2.1% 7 1.4% 5 0.5% 5 0.5% 5 IN Indianapolis 1.1% 12 0.5% 12 0.1% 12 0.0% 12 MD Baltimore 1.0% 13 0.5% 13 0.1% 13 0.0% 13 MI Detroit 2.5% 2 1.2% 6 0.3% 8 0.0% 8 MN Minneapolis 2.4% 4 1.2% 7 0.3% 9 0.0% 9 MO Kansas City 1.7% 10 1.0% 9 0.3% 7 0.2% 7 MO St. Louis 1.7% 9 1.0% 8 0.3% 6 0.2% 6 NY Buffalo 2.3% 5 1.8% 4 0.8% 4 0.8% 4 NC Charlotte 2.5% 3 1.8% 3 0.8% 3 0.8% 3 OH Cleveland 1.5% 11 0.7% 11 0.2% 11 0.0% 11 PA Pittsburgh 3.1% 1 2.7% 1 1.3% 1 1.6% 1 TN Nashville 2.3% 6 2.2% 2 1.1% 2 1.4% 2 TX Dallas 0.7% 14 0.3% 14 0.1% 14 0.0% 14 WI Milwaukee 1.9% 8 0.9% 10 0.2% 10 0.0% 10 E. Local Property Tax FL Orlando 1.4% 6 1.6% 8 0.5% 14 0.1% 13 IL Chicago 1.0% 13 0.6% 15 0.7% 9 0.1% 12 IN Indianapolis 2.1% 3 2.4% 4 0.8% 6 0.2% 6 MD Baltimore 1.4% 7 4.1% 1 0.6% 12 0.2% 7 MI Detroit 2.4% 1 3.3% 2 1.2% 1 0.3% 1 MN Minneapolis 1.1% 10 0.8% 12 1.0% 3 0.2% 4 MO Kansas City 2.2% 2 2.5% 3 0.9% 4 0.2% 3 MO St. Louis 2.0% 5 2.1% 6 0.8% 5 0.2% 5 NY Buffalo 1.3% 8 0.9% 11 1.2% 2 0.2% 2 NC Charlotte 1.0% 12 1.1% 10 0.3% 15 0.1% 15 OH Cleveland 0.9% 14 0.6% 14 0.7% 8 0.1% 11 PA Pittsburgh 0.9% 15 0.6% 13 0.8% 7 0.1% 10 TN Nashville 1.2% 9 1.3% 9 0.5% 13 0.1% 14 TX Dallas 2.1% 4 2.2% 5 0.7% 10 0.1% 8 WI Milwaukee 1.0% 11 2.0% 7 0.7% 11 0.1% 9

29

Figure 2a: State and Local Effective Tax Rates for Industrial Machinery Manufacturing

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Corporate income and franchise tax

Sales and gross receipts tax

Other tax

Property tax

Average for comparison cities (6.4%)

Figure 2b: State and Local Effective Tax Rates for Information Technology

0%

2%

4%

6%

8%

10%

12%

14%

16%



Other tax

Property tax


30

Figure 2c: State and Local Effective Tax Rates for Financial Funds Management

0%

1%

2%

3%

4%

5%

6%



Other tax

Property tax


Figure 2d: State and Local Effective Tax Rates for Management Offices

0%

1%

2%

3%

4%

5%

6%



Other tax

Property tax


31

Figure 3a: State Effective Tax Rates for Industrial Machinery Manufacturing

0%

1%

2%

3%

4%

5%

6%

7%

8%



Other tax


Figure 3b: State Effective Tax Rates for Information Technology

0%

2%

4%

6%

8%

10%

12%

14%



Other tax


32

Figure 3c: State Effective Tax Rates for Financial Funds Management

0%

1%

2%

3%

4%

5%

6%



Other tax


Figure 3d: State Effective Tax Rates for Management Offices

0%

1%

2%

3%

4%

5%

6%



Other tax


33

Impact of Statutory Credits on Business Tax Liabilities Table 15 below reports the change in the effective tax rates for the selected industries after any reductions due to statutory tax credits designed to encourage new in-state capital investment, increased employment and higher research and development expenditures. The comparison of the effect of credits on ETRs indicates how tax credits affect a state’s business tax competitiveness.

Table 15 Percentage Point Reduction in State and Local Business Effective Tax Rates

Due to Statutory Credits

State City


Manufacturing

Information Technologies/Data

Processing

Financial Funds

Management Management

Offices FL Orlando -0.9% 0.0% 0.0% 0.0% IL Chicago 0.0 0.0 0.0 0.0 IN Indianapolis -1.6 -0.9 -0.9 0.0 MD Baltimore -2.5 -0.7 -0.8 0.0 MI Detroit -1.2 -0.5 -0.4 0.0 MN Minneapolis -0.7 -0.2 -0.2 0.0 MO Kansas City -0.7 -0.5 -0.8 -0.1 MO St. Louis -0.7 -0.5 -0.8 -0.6 NY Buffalo -0.4 0.0 0.0 0.0 NC Charlotte -1.5 -0.7 -0.4 0.0 OH Cleveland -0.3 -0.2 -0.2 0.0 PA Pittsburgh -1.1 -0.3 -0.4 0.0 TN Nashville -0.9 0.0 0.0 0.0 TX Dallas -0.8 -0.6 -0.5 0.0 WI Milwaukee -1.2% -1.1% -0.4% 0.0%

34

III. Combined Business and Household Tax Burdens This section expands the business tax competitiveness analysis to include individual income taxes and property taxes on residential property that would be paid by the employees that are associated with the expansion of the representative industries. As noted earlier in the comparative assessment, Wisconsin imposes relatively high property taxes on residential property and has one of the most progressive individual income taxes. The business tax competitiveness analysis is expanded to include this additional tax burden imposed on employees related to new business investments in each location. The employee income and property tax burden calculations apply estimated effective tax rates (taxes paid divided by income) by income level in each state to the average annual compensation paid to the added employees for each expansion.11 This calculation produces an estimate of the total individual income and residential property taxes paid by the new employees. The employee tax amount is then converted into an employee tax differential for each industry by subtracting the employee taxes in the lowest location from each location’s employee tax amounts.12 In the final step of the calculation, the employee tax differential is added to the business taxes on the expansion to derive an aggregate business and employee tax amount for each location. Table 16 compares the combined business and employee tax burdens for each industry at each of the 15 locations. To simplify the comparisons, the combined business and employee tax amounts are expressed as index numbers relative to the tax level in the lowest tax location for each industry. For example, the total state and local taxes generated by the expansion for the industrial machinery manufacturer in Milwaukee is 3.13 times the level of taxes on the same expansion in Nashville, the lowest tax location. In other words, the combined taxes in Milwaukee are 213% greater than the amount in Nashville. The index numbers can also be compared for different locations. A comparison of Milwaukee’s index of 3.13 to Charlotte’s index of 2.45 shows, for example, that Milwaukee’s combined taxes are 28% higher than the taxes in Charlotte. As shown in a comparison of rankings in Table 12 (business taxes) and Table 16 (combined taxes), Milwaukee’s tax rankings increase significantly with the addition of the individual income and residential property taxes paid by employees. Milwaukee now

11

The effective tax rates are taken from the Institute on Taxation & Economic Policy (ITEP) study, Who Pays?, referred to in the inventory section earlier. See Appendix B for a more detailed explanation of the methodology used to estimate combined business and household tax burdens. 12

The employee tax differential is assumed to affect an employee’s decision about taking a new job in each location. Employees are assumed to weigh the balance of state and local spending and taxation in making location choices. To the extent that higher state and local individual income and property taxes in one location exceed the value employees place on state and local expenditures in that location, businesses may have to compensate employees with higher wages to offset this difference. The calculations of the combined business and employee taxes add the full employee tax differential to the estimated business taxes on the expansion. No adjustment is made to reflect differences in state and local spending levels among the locations that may offset a portion of the tax differential.

35

emerges as one of the least competitive locations for the machinery manufacturing and information technology industries. Milwaukee ranks 3rd highest for machinery manufacturing, just behind Buffalo and Detroit. For the information technology expansion, Milwaukee is tied with Baltimore as the highest taxed location.

36

Table 16

Index of Total Tax Burden and Rankings among Comparison States by Industry and Location


Manufacturing Information Technology Financial Funds Management Management Offices

Location Index

Location Index

Location Index

Location Index Buffalo, New York 3.21

Baltimore, Maryland 1.96


Nashville, Tennessee 7.92

Detroit, Michigan 3.21

Milwaukee, Wisconsin 1.95

Chicago, Illinois 2.93

Pittsburgh, PA 7.77 Milwaukee, Wisconsin 3.13

Buffalo, New York 1.87

Pittsburgh, PA 2.78


Minneapolis, Minnesota 2.69

Charlotte, NC 1.84

Minneapolis, MN 2.74

Charlotte, NC 7.69 Charlotte, NC 2.45


Charlotte, NC 2.67


Cleveland, Ohio 1.99

Chicago, Illinois 1.70


Orlando, Florida 5.16 St. Louis, Missouri 1.91





Pittsburgh, PA 1.39


Chicago, Illinois 4.43 Chicago, Illinois 1.84

St. Louis, Missouri 1.38



Pittsburgh, PA 1.61



Indianapolis, Indiana 3.99 Kansas City, Missouri 1.47

Kansas City, Missouri 1.35



Indianapolis, Indiana 1.46



Kansas City, Missouri 3.81 Orlando, Florida 1.13

Orlando, Florida 1.18

Kansas City, Missouri 1.66


Dallas, Texas 1.01


Orlando, Florida 1.59

Cleveland, Ohio 2.20 Nashville, Tennessee 1.00

Dallas, Texas 1.00

Dallas, Texas 1.00

Dallas, Texas 1.00

37

As reported in Table 12 (business tax rankings), Milwaukee ranks 13th and 14th highest for these two industries. The combination of the relatively large number of employees added in these two expansions and the relatively high income and property taxes paid by Milwaukee employees explains the significant increase in Milwaukee’s tax rankings in Table 16 compared to the business tax rankings in Table 12. Milwaukee ranks 7th for the combined taxes on the financial funds management expansion and 9th for the management offices expansion. The rankings for business taxes alone (Table 12) are 11th and 9th, respectively. Adding in the employee income and property tax amounts has less of an impact on the rankings for these two industries because of the relatively smaller number of new employees related to the expansions and the fact that Milwaukee’s wages are closer to the average for the comparison locations in these industries. In summary, for the combined business and employee tax burdens, Milwaukee ranks:

• 3rd in industrial machinery manufacturing (compared to 13th for business taxes only),

• 2nd in information technology (compared to 14th for business taxes), • 7th in financial funds management (compared to 11th for business taxes), and • 9th in management offices (no change in the ranking).

The higher Milwaukee rankings for combined business and employee taxes are due to Milwaukee’s relatively high individual income and property tax effective tax rates and employee earnings. In addition, the total employee taxes are relatively large compared to the business tax total given the significant number of employees added, particularly in the manufacturing and information technology expansions. As a result, the rankings for the combined business and employee tax burdens are more influenced by the individual income tax and residential property taxes paid by employees.

A-1

Appendix A

Industries Used in the Business Competitiveness Analysis

The business tax competitiveness analysis in Section II estimates the state and local effective tax rates paid on new investments or expansions in selected locations by representative firms in the following four industries selected by MMAC. The industry descriptions are from the North American Industry Classification System (NAICS). The net income and balance sheet information for the representative firm in each industry comes from the IRS Statistics of Income, Corporation Tax Reports. Machinery Manufacturing The manufacturing industry representative firm is based on IRS data for the Industrial Machinery Manufacturing NAICS industry (3332). Firms in this industry group design and manufacture machinery for specific industrial applications. Financial Funds Management The financial data for this representative firm will be based on the IRS information reported for the Other Financial Investment Activities NAICS industry (5239) and the Securities and Commodity Exchanges NAICS industry (5232). Firms in this group of industries are primarily engaged in managing portfolio assets of others on a fee or commission basis, acting as principals in buying or selling financial contracts, providing other investment services, and operating marketplaces for stocks, bonds and commodity contracts. Management Offices The financial data for this firm will be based on IRS data for the Corporate, Subsidiary, and Regional Managing Offices NAICS industry (551114) and the Offices of Other Holding Companies NAICS industry (551112). Firms in this industry are primarily engaged in administering, overseeing, and managing other establishments of a company and in serving as non-bank holding companies. Information Technologies The financial data for this firm will be based on IRS information for the Data Processing, Hosting, and Related Services NAICS industry (51821). Firms in this industry are primarily engaged in providing data processing services and infrastructure for housing data processing.

B-1

Appendix B

Methodology for Estimating Combined Business and Employee Taxes

Employee Tax Estimates This study uses estimates of the effective statewide tax rates (taxes divided by income) from the state-by-state tax burden distributions reported in the Institute on Taxation & Economic Policy’s (ITEP) November 2009 study, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States. The study reports effective tax rates for residential property taxes and personal income taxes by family income quintiles. Bureau of Labor Statistics (BLS) county-level average annual pay information, by industry, from the Quarterly Census of Employment and Wages was used to determine the income level of the added employees for each of the four industry expansions in each location. The ITEP state and local effective income and property tax rates from the fourth quintile were applied to the total employee earnings to estimate the total employee tax amounts in each location. The estimates do not include an offset for federal deductibility of state and local income and property taxes for itemizers. For each location and industry, annual employee tax costs were estimated for the 30-year time horizon used for the business tax competitiveness analysis. The taxes were summarized as the net present value of the 30-year tax stream. To determine the relative employee tax costs, the total employee tax cost amount for the lowest employee tax location (Nashville for the manufacturing example, and Dallas for the other three examples) was subtracted from each employee tax amount. The differences were added to the present discounted values of the business tax totals estimated in the business competitiveness analysis. Locations then were ranked by the combined business and employee tax amounts. To facilitate interpretation of the tax differential results, the combined tax dollar amounts were transformed into an index equal to the ratio of combined taxes in each location to the taxes in the lowest tax location for each industry. The lowest tax location has an index value of 1.00. For the Milwaukee industrial machinery manufacturing industry the index number is 3.13. In other words, the expansion in Milwaukee would be subject to $313 in direct business or employee indirect taxes, or $213 additional dollars, for every $100 of combined taxes paid in Nashville.

ernst and young tax burden study

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