Businesses Moving Toward an Integrated Approach to State and Local Tax Analysis and Planning
Results from studies such as the recent COST Report, generous state tax incentives, and a move toward automation are reducing state and local tax burdens.
Businesses paid more than $688 billion in total state and local taxes in FY2014, an increase of 2.2% over FY2013. This is one of the key takeaways from the Council on State Taxation’s (COST’s) recently released report, “Total State and Local Business Taxes: State-by-State Estimates for Fiscal Year 2014.” It shows that the growth in business tax revenue is concentrated in property taxes, sales taxes, and corporate income taxes.
Considering the 2.2% tax increase, it is critical to a firm’s decision-making to know the tax rates of states and localities, as well as the types of taxes assessed. This 28-page COST report delves into ways a state’s tax burden can be measured — by comparing the level of business taxes to the level of economic activity subject to taxation, or by measuring the final incidence of business taxes, once shifted to consumers or owners of factors of production, including workers. It also provides state-by-state total effective business tax rates (TEBTR), which are measured by taking the ratio of state and local business taxes and the private-sector gross state product (GSP), and applying it to the total value of a state’s private sector annual production of goods and services.
As the report alludes, many tax professionals can attest that state and local governments have been quickly changing tax policies in order to attract or retain businesses, making it even more challenging to stay up to date. Underscoring these sentiments, the COST report warns that while “TEBTR provide a starting point for comparing tax burdens across states, they do not provide all information required to evaluate a state’s competitiveness.” For example, states with relatively low TEBTR derive most of their business taxes from origin-based taxes, such as property and sales taxes. These states are not as competitive as those with higher TEBTR that rely on a high percentage of out-of-state business taxes.
The bottom line is while in-depth analytical insight is critical to deciding things like where to open a new office or relocate a corporate headquarters, important business decisions are not derived from a single factor or from historical data alone. Critical findings from studies such as the COST report, available state tax incentives, and the use of automation technology provide a comprehensive approach to state tax analysis and planning. This approach ensures that one strategic maneuver does not negatively impact a state’s overall tax goals. Until recently, such an approach was a huge manual undertaking for businesses.
State tax professionals rely on State Tax Analyzer™ from Bloomberg Tax Technology to quickly model out multistate, multiyear scenarios. In addition, with built-in tax rates and rules, including future enacted tax law, they can proactively analyze facts to support decision-making, taking the guesswork out of state tax analysis and planning.