How to Tap into State Tax Incentives
States are creating huge tax incentives to lure businesses into their respective regions – with billions in tax savings in the wings.
Constantly changing state tax reform, in which there seems to be a tax code update every week, has finance departments struggling to keep up. Whether states are offering tax incentives to attract new businesses, or raising taxes to quickly address a specific budgetary crisis, the impact on businesses is the same; they are left with the cumbersome task of interpreting and implementing these ongoing tax changes into their operational systems. This is particularly daunting for the estimated 87 percent of companies that still use manual spreadsheets to manage state tax compliance.
Ironically, the very source of a tax team’s pain -- changing legislation -- also presents a significant tax-savings opportunity. Many of the recent tax structure changes have been made to encourage business investment. At the start of 2015, states including Arizona, Illinois, New Mexico, and Rhode Island reduced their corporate income tax rates. In many instances, these incremental cuts were part of multiyear legislation to lower the rates even further. A handful of other states, such as Pennsylvania, recently introduced proposals to slash corporate taxes and loosen apportionment regulations. In other words, states are creating huge tax incentives to lure businesses into their respective regions. The result is millions and even billions of dollars in potential tax savings.
As examples of the potential tax savings, Mercedes-Benz USA announced it would move its domestic headquarters from New Jersey to Georgia, which offered the automaker an incentives package valued at around $50 million. Similarly, last year Nevada offered Tesla a $1.3 billion incentives package to build the company’s new “gigafactory” there. As part of the package, Tesla will be exempt from paying sales taxes for 20 years, and property and business taxes for 10 years.
To achieve tax savings such as Tesla and Mercedes, a company has two options: either wait to be approached by a state official, or proactively seek tax relief themselves. For most, the latter approach is their only option.
Consider, for example, a company, like many firms, looking to achieve tax savings by relocating its corporate headquarters. It may begin by reading market research such as Bloomberg Tax's survey of 100 corporate tax professionals. From this study they would learn that many of their colleagues consistently rank Texas, Nevada, and Florida as the most competitive states, based on their pro-business tax structures. Specifically, by reading this study, they would discover that:
- More than a third (34%) of respondents cited Texas as a friendly tax landscape, due largely to the state’s lack of a corporate income tax and generous economic incentives. In 2014 alone, Texas awarded $85.9 million in property tax abatements.
- Nevada has a favorable reputation in the business community, with 33% of respondents acknowledging the state’s welcoming tax policies. Like the Lone Star State, Nevada also forgoes a corporate income tax and awards ample economic incentives, including a $1.3 billion package to win Tesla’s new “gigafactory.”
- More than a quarter (27%) of respondents cited Florida as having a business-friendly tax environment, recognizing the state’s low (5.5%) flat corporate income tax and ongoing tax reforms.
On the other side of the spectrum, states such as California, New York, and Illinois are ranked as “unfriendly” corporate tax environments.
- More than three-quarters (77%) of respondents view California’s tax policies negatively, reflecting the state’s high corporate income tax (8.84%), especially for financial institutions (10.84%).
- Like California, New York struggles with a poor reputation. 66% of respondents believe the state’s tax policies are hostile to business, likely with its 7.1% corporate income tax rate to blame. However, ongoing reforms (including the 2015 elimination of the state’s AMT base and a scheduled corporate income tax rate drop to 6.5% in 2016) promise to bolster New York’s competitiveness going forward.
- Illinois is often viewed as antagonistic to businesses, with 32% of respondents claiming the state’s policies contribute to an unfavorable corporate tax landscape. Until dropping its rate to 7.75% in early 2015, Illinois taxed corporate income at 9.5%.
Based on the research findings alone, Texas, Nevada, and Florida appear to be the top states to consider for relocation purposes. However, the study also points out that corporate tax rates aren’t everything; the gap between the most and least favorable state tax environments is determined largely by incentive prioritization. Property tax abatements and credits remain highly coveted among businesses, but are less commonly awarded by local governments.
These findings underscore the need for corporations to conduct exhaustive quantitative tax and accounting due diligence prior to making any major move. Before committing to a relocation or development in another state, businesses are advised to model out the financial ramifications of different scenarios over the short and long term, and identify which incentives would be most valuable. Tax and accounting teams should also consider variables beyond the new state’s corporate income tax rate, including apportionment factors, credits, and NOL rules (a hard exercise to conduct when you’re bound by spreadsheets.)
The big question then becomes, how does a company “model out” and uncover those potential tax savings? The answer is, through the right technology tools. Whether categorized under the guise of tax analyzing, strategy, planning, or modeling, the goals are the same: to leverage cutting-edge technology to make smart, accurate, cost-saving decisions. Larry Martin, an executive with experience as the head of tax for several companies, summarizes this by saying, “As the head of tax, my goal has always been to automate as much of the tax function as possible, because doing so improves efficiency, allows Tax to be a true partner with the business, and reduces risk. Products like State Tax Analyzer™ are great because they allow tax professionals to focus on what they do best, delivering value to the organization through forward-thinking and proactive tax analysis, rather than merely shuffling around data or programming tax law into spreadsheets.”
Without effective software such as the newly released State Tax Analyzer™, which automates and manages complex state corporate income tax calculations across multiple years, scenarios, and states, it would be impossible to confidently make a “what-if” decision such as where to relocate corporate headquarters.
The bottom line is that whether local government increases or lowers corporate tax rates or creates a new tax all together, the responsibility is still on businesses to navigate the complex tax environment to achieve compliance. However, by using advanced state tax planning tools, companies can go beyond just achieving mandated compliance and take advantage of the many possible state tax incentives currently available.
Because State Tax Analyzer automates and manages complex state corporate income tax calculations across multiple years, scenarios, and states, companies can stay on top of regulatory changes. To get a quick snapshot of 2015 corporate tax reforms and see what’s on the horizon for 2016 and beyond, go to our State-Level Corporate Tax Changes Infographic »