Location Matters for New England

Jared WalczakPolicy Analyst

jmw@taxfoundation.org

• Allows us to see which taxes are the most significant for different types of businesses

• Sheds light on the cost and significance of incentives

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

• Illustrates how structural aspects of state tax codes can be as important as top line rates

• Corporate Headquarters

• Research & Development Facility

• Retail Store

• Capital-Intensive Manufacturer

• Labor-Intensive Manufacturer

• Call Center

• Distribution Center

• Connecticut: 19.0% (44th)

• Maine: 15.1% (35th)

• Massachusetts: 15.3% (37th)

• New Hampshire: 12.0% (13th)

• Rhode Island: 16.1% (39th)

• Vermont: 13.1% (21st)

CT: 44

ME: 35

MA: 37

NH: 13

RI: 39

VT: 21

• States with best rates for corporate HQs do without one of the major taxes, such as a corporate income or sales tax

• Property and sales tax burdens often substantial, UI burdens relatively modest

• New firms frequently benefit from generous incentives, which can increase costs for mature operations

• Connecticut: 14.5% (42nd)

• Maine: 7.8% (9th)

• Vermont: 10.9% (22nd)

CT: 42

MA: 37

NH: 34

RI: 30

VT: 22

• Many states offer significant R&D incentives which limit or even eliminate corporate income tax liability

• Benefits sourcing can also be highly advantageous for R&D firms

• With income taxes likely to be low, property taxes typically represent the largest share of an R&D firm’s liability by a substantial margin

• Maine: 16.6% (34th)

• Vermont: 16.4% (32nd)

CT: 44

ME: 34

MA: 44

NH: 27

RI: 47

VT: 32

• Retail is rarely the beneficiary of incentives, so low CIT rates are uniquely important drivers of overall liability

• Property tax burdens tend to far outstrip sales tax liability; note that our study does not include sales taxes imposed on the stores’ own merchandise

• Retail stands out as having lower effective tax rates for mature than new operations

• Maine: 17.6% (48th)

• New Hampshire: 12.6% (33rd)

• Vermont: 17.2% (47th)

CT: 44

ME: 35

MA: 37

NH: 13

RI: 39

VT: 21

• Favorable apportionment factors and the absence of a throwback rule can be more important than statutory top CIT rates

• Property and sales tax burdens often substantial, UI burdens relatively modest

• New firms frequently benefit from generous incentives, which can increase costs for mature operations

• Maine: 13.4% (44th)

• Vermont: 12.8% (41st)

CT: 12

ME: 44

MA: 45

NH: 38

RI: 50

VT: 41

• Property taxes are less important to labor-intensive manufacturing operations than they are to capital-intensive ones, but states limiting property taxes to land and buildings are still the most attractive

• UI taxes can take on somewhat greater significance, but corporate income taxes are generally the driver of tax burdens

• Maine: 14.8% (9th)

• Vermont: 20.3% (29th)

CT: 46

MA: 48

NH: 40

RI: 49

VT: 29

• UI taxes play an outsized role because call centers are low-wage and labor-intensive

• The impact of CITs is heavily dependent upon sourcing rules (benefits vs. IPA)

• Job creation tax credits are often a highly significant consideration for new firms, and sometimes for mature firms as well

• Maine: 22.9% (18th)

• Vermont: 32.7% (38th)

CT: 36

ME: 18

MA: 47

NH: 37

RI: 48

VT: 38

• Property taxes are frequently responsible for more than two-thirds of firms’ overall tax burdens

• States which impose property taxes on equipment, inventory, or both fare particularly poorly

• States often seek to alleviate these burdens through targeted abatements

CH: 44

RD: 42

RT: 44

MC: 14

ML: 12

CC: 46

DC: 36

• Including a 20% surtax, Connecticut’s top CIT rate is 9%, while the 6-bracket PIT has a top rate of 6.7%

• The PIT contains a recapture provision

• Connecticut imposes the highest capital stock tax in the country (0.37%, $1M max)

• A budget with a surtax extension, a move to combined reporting, and various miscellaneous new taxes led GE and Aetna to threaten to leave the state

CH: 44

RD: 42

RT: 44

MC: 14

ML: 12

CC: 46

DC: 36

• State imposes an above-average tax burden on all non-manufacturing operations, driven by high CIT

• Manufacturing and service firms benefit from single sales factor apportionment

• Connecticut foregoes a throwback rule

• Property tax base includes equipment

CH: 35

RT: 34

MC: 48

ML: 44

DC: 18

• Maine’s 8.93% CIT and 7.95% PIT are both significantly above-average nationwide, though the state has a fairly modest 5.5% sales tax with no local option

• This year, the Governor proposed, but the legislature ultimately rejected, broadening the sales tax base to include many services

• Legislature had to override the Governor’s veto to enact a budget

CH: 35

RT: 34

MC: 48

ML: 44

DC: 18

• The state’s high CIT is ameliorated for some firms by benefit sourcing and single sales factor apportionment

• But the state does impose a throwout rule

• Applies the property tax to equipment

• New firms benefit from 10% credit on investment up to $3.5M over 7 years

CH: 37

RD: 37

RT: 44

MC: 37

ML: 45

CC: 48

DC: 47

• Massachusetts’ modest PIT currently stands at 5.15%, with a trigger kicking in to reduce the rate slightly this year

• The state’s CIT, however, stands at 8.0%, and property taxes are unusually high

• Massachusetts also has high and poorly structured unemployment insurance taxes

CH: 37

RD: 37

RT: 44

MC: 37

ML: 45

CC: 48

DC: 47

• The state employs double-weighted sales factor apportionment for all but manufacturers, which receive SSF

• Massachusetts relies on IPA sourcing and imposes a throwback rule

• The state’s already high property tax rates extend to equipment

• Incentives do little to alleviate burdens

CH: 13

RD: 34

RT: 27

MC: 33

ML: 38

CC: 40

DC: 37

• Imposes a CIT (business profits tax) at 8.5% and a VAT-style tax (business enterprise tax) at 0.75%

• Foregoes a sales tax and only imposes individual income taxes on interest and dividend income

• For 2016, BPT goes to 8.2%, BET 0.72%

• Triggers could reduce BPT to 7.9% and BEP to 0.675% by the end of 2018

CH: 13

RD: 34

RT: 27

MC: 33

ML: 38

CC: 40

DC: 37

• State uses double-weighted sales factor apportionment with a throwback rule

• IPA sourcing rules for service provision

• Relatively high tax burdens for most businesses due to few individual taxes

• Property taxes, though a major source of collections, are limited to real property

CH: 39

RD: 30

RT: 47

MC: 39

ML: 50

CC: 49

DC: 48

• Rhode Island’s corporate income tax declined from 9% to 7% in FY 2015(after the book’s snapshot date)

• The state also finished phasing out its antiquated capital stock tax

• Rhode Island’s 7% sales tax is the highest rate among the New England states

• FY 2016 budget includes generous job credits, new development credits, &c.

CH: 39

RD: 30

RT: 47

MC: 39

ML: 50

CC: 49

DC: 48

• The state uses three-factor apportionment except for manufacturing firms, which can use optional double-weighted sales factor

• Rhode Island also adopts a throwback rule and sources all service income in-state

• The state imposes some of the highest property taxes in the nation on our model firms, though new firms benefit from generous property tax abatements and investment tax credits

CH: 21

RD: 22

RT: 32

MC: 47

ML: 41

CC: 29

DC: 38

• Like most of its peers in New England, Vermont levies high top CIT (8.5%) and PIT (8.95%) rates; both taxes are graduated

• The state’s 6.0% sales tax is augmented by very modest local sales taxes (0.14% avg.)

• Vermont’s PIT brackets, standard deduction, and personal exemption are indexed for inflation

CH: 21

RD: 22

RT: 32

MC: 47

ML: 41

CC: 29

DC: 38

• Vermont uses double-weighted sales factor apportionment and IPA sourcing, and imposes a throwback rule

• The property tax base includes land, buildings, and equipment, but the tax on buildings and equipment is wholly abated for a firm’s first five years of operation

• State offers generous incentives to new firms—including, atypically, to retail

• Region characterized by high rates, often offset by substantial incentives which pick winners and losers—chance for a state to stand out with neutral tax code

• Equipment often included in the property tax base, substantially increasing tax costs for many firms

• Uncompetitive tax codes leaning heavily on legacy businesses and existing industry mixes; can these states adapt as economy evolves?

• Businesses care about more than just taxes, but tax rates & structures are important to business decisions

Location Matters for New England

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