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Taxes Aren't High Unless You Have To Pay Them

Some states tax individuals more, some tax companies more.What's important is the mix.

States competing for growing businesses, particularly high-technology companies, dangle a smorgasbord of incentives before their targets. Of them all, perhaps the most frequently mentioned is the "favorable tax climate" you'il enjoy if you move. And ask any group of businessmen what they dislike most about their current home and 8 times out of 10 they'll say "high taxes."

Most small businesses, of course, can't or don't pull up stakes and move from one part of the country to another. Still, it's important to examine the real impact of tax rates on a business climate. What kinds of taxes are generally favorable to smaller companies? What kind of tax structure should you look for if you are thinking about expanding in another state? And if you're staying put, what difference do taxes make in your competitive position?

The accompanying chart shows some significant tax differences among the states; it also points out how difficult it is to generalize about the effect of taxes on a state's business climate. The percentage of state and local taxes that fall primarily on business ranges from 63% in Alaska to 21% in Nebraska. So, you might expect that it's three times as hard to do business in Alaska as in Nebraska. But everyone knows that Alaska, unlike Nebraska, is growing rapidly. It's clear from the chart that a lot of the states that tax businesses heavily are those that are growing -- and growing states obviously have growing businesses.

Take Texas, for example. It ranks fifth on the chart, but since it has no corporate income tax, it is thought to have a good business climate. A lot of small business start-ups (and a lot of small business deaths) occur there. Though it relies more heavily than most states on taxes that businesses pay, business incomes are high in Texas, so the total tax burden is not particularly oppressive.

Personal taxes can be as important in doing business as business taxes. If employees must pay much of their income to the state, you'll have to pay them more to compensate.

How much you get for your taxes is as important as how much you pay. In his study of business birth and expansion all over the United States, David Birch, of the Massachusetts Institute of Technology, found that businesses expanded more often in high property tax areas than in ones with low property taxes. Taxes buy government services, and few companies or good employees want to put up with poor services.

Before you consider moving from a state with a high business tax rate to one with a low rate, you need to analyze the benefits to be derived from government services to you, your employees, and your cusomers. Labor, transportation, capital, and energy costs may be greater than the taxes you would save by moving, and those high state and local taxes also mean a significant reduction in your federal tax liability. Firms that want to expand or relocate ought to look first for areas with more rapidly growing markets and lower labor and capital costs, and only then examine the tax structure.

But how do you judge the effects of taxes in a given place on your own ability to compete? Payroll taxes hit labor-intensive firms -- usually the smaller ones -- harder than the capital-intensive ones. Property tax reforms such as California's Proposition 13 benefits companies with large land and real estate holdings. Liberal depreciation schedules benefit capital-intensive companies that have significant profits; they often put at a competiive disadvantage the growing smaller companies that are labor-intensive and have yet to realize significant profits.

It's difficult to generalize about the kind of tax structure that would benefit all small businesses, because their production processes differ so greatly. But smaller companies benefit most from the following kinds of taxes:

* Net profit taxes are preferable to sales or gross receipts taxes for new and rapidly expanding firms whose sales are usually growing more rapidly than their profits.

* A corporate income tax with a progressive rate structure like Wisconsin's, Kentucky's, or Arizona's is preferable to one that takes a fixed percentage of profits, like California's, New York's, or Minnesota's. A growing firm's profits are likely to be lower than those of its established competitors.

* The value-added tax doesn't discriminate between labor-intensive and capital-intensive firms, so it's preferable to payroll or property taxes.

* A personal property tax that doesn't include inventories benefits smaller retailers and wholesalers, who tend to be inventory-intensive.

Since state and local governments are becoming more sensitive about creating a desirable business climate and are using business subsidies defensively, to keep rapidly growing firms from expanding in other states, they need to hear your views on what taxes put you at a competitive disadvantage. No public official wants to be responsible for a runaway plant. The time is right to develop your political leverage through small business and trade associations. TAX BURDENS AMONG THE STATES

Bus. tax to Corporate tax rate n2

State total tax n1 Range No. of steps

1. Alaska 63.3 5.4%+4% 1


2. Louisiana 52.2 4%-8% 5

3. Wyoming 51.4 None

4. West Virginia 45.4 6% 1

5. Texas 42.6 None

6. New Mexico 39.7 4%-6% 3

7. Montana 38.1 6.75% 1

8. Oklahoma 35.1 4% 1

9. Washington 35.1 None

10. Tennessee 34.9 6% 1

11. Delaware 34.2 8.7% 1

12. Connecticut 33.4 10% 1

13. Kansas 33.0 4.5%+2.25% 2

surtax over $25,000

14. Ohio 32.9 4%-8% 2

15. Nevada 32.7 None

16. Alabama 32.6 5% 1

17. Florida 32.0 5% 1

18. Illinois 32.0 4% 1

19. District of Columbia 31.9 9%+10% surtax 1

20. Arizona 31.8 2.5%-10.5% 7

21. Mississippi 31.7 3%-4% 2

22. Colorado 31.1 5% 1

23. California 31.0 9.6% 1

24. Missouri 30.9 5% 1

25. New York 30.4 10% 1

26. New Hampshire 30.1 8% 1

27. New Jersey 29.8 9% 1

28. Indiana 29.6 3% 1

29. Pennsylvania 29.4 10.5% 1

30. Utah 28.9 4% 1

31. Kentucky 28.8 3%-6% 4

32. Michigan 28.5 None

33. Virginia 28.4 6% 1

34. Oregon 28.3 7.5% 1

35. Arkansas 27.6 1%-6% 5

36. Idaho 27.6 6.5% 1

37. North Carolina 26.7 6% 1

38. North Dakota 26.7 2%-7% 6

39. Rhode Island 26.7 8% 1

40. Vermont 26.6 5%-7.5% 4

41. Minnesota 26.2 12% 1

42. South Carolina 26.1 6% 1

43. Georgia 25.7 6% 1

44. Hawaii 25.3 5.85%-6.435% 2

45. Maine 24.6 4.95%-6.93% 2

46.Maryland 24.1 7% 1

47. Massachusetts 23.5 8.33%+14% 1


48. South Dakota 22.8 None

49. Wisconsin 22.5 2.3%-7.9% 7

50. Iowa 21.5 6%-10% 3

51. Nebraska 20.8 3.75%-4.125% 2

n1 Business taxes include unemployment, property, sales and gross receipts, corporate net income, severance, licenses fees, and other charges paid directly by business. Data for 1977.

n2 Rates are for 1981. For more detail see State Tax Guide.

Source: Advisory Commission on Intergovernmental Relations, Interstate Tax Competition (Report A-76), and Commerce Clearing House, State Tax Guide.

Last updated: Oct 1, 1981

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