Site Decision and Tax & Regulatory Environments
Often times in surveys, economic development incentives are not the number one factor as to why a company chooses a specific location to relocate or expand its operations. Talent and business climate continue to rank as top factors year over year. Economic development incentives help offset the project and operating expenses the company incurs in the first 1-15 years. However, the structure of those incentives varies greatly, and the win for the community is the direct and indirect income from taxes and personal spending infused in the community over the long-term.
Using location modeling for the cities under consideration for an expansion or relocation project is one of the critical ways site selectors give companies complete information when making location decisions. Understanding the tax and regulatory environments of the contending communities is essential to a well-informed decision.
Disinvestment can be broken down into basically relocating an entire office, expanding out-of-state, or shifting operations out-of-country. Rankings come out annually from Forbes, Tax Foundation, Area Development, Site Selection Magazine, CNBC and many others giving an overview to the business climates of all 50 states.
It’s pretty well accepted that California is considered to have one of the worst business climates in the United States and it consistently ranks at the bottom of surveys. Using California as an example, about 10,000 companies over the last eight years have left California or curtailed operations to reduce costs, as reported by L.A. Biz in August 2016, with reference to a 2016 report by Spectrum Locations.
California may have a talented workforce, great proximity to trade with Asia, and a nearly unbeatable climate, however businesses are leaving every year. Clearly, some can likely be attributed to the restraints imposed by what is considered a hostile business environment.
Let’s examine a few of the lowest and highest ranking states for business and the impact of tax and regulatory factors on site selection decisions.
States primed for disinvestment potential:
Corporate Taxes – California ranks 48th in the United States in the Tax Foundation’s 2017 Business Tax Climate Index.
Corporate taxes and labor costs continue to be some of the highest in the country. In June 2016, California State Controller, Betty T. Lee released the Comprehensive Tax Reform in California: A Contextual Framework referred to California’s tax structure as “outdated, unfair, and unreliable.” She goes on to urge other leaders to join her in pushing for tax reform. It is possible that California won’t stay in the bottom position much longer, but public policy makers must be willing to enact significant changes to the state’s tax code.
Regulatory Environment – California is ranked #48 for regulatory environment and 32nd overall in Forbes Best States for Business
California has cities with rent control and new housing supply is tightly restricted in many areas. It is known for its high unionization of public-sector employees and large public pension fund liability. There is no right-to-work law, a high state minimum wage (currently, $10 per hour), and a strict worker’s compensation mandate that includes large spending on worker’s compensation and unemployment costs.
Corporate Taxes – Pennsylvania ranks 24th in the United States in the Tax Foundation’s 2017 Business Tax Climate Index.
Pennsylvania’s tax burden is average. Pennsylvania is in the midst of phasing out its capital stock tax. It was scheduled to be eliminated in 2014, but has been extended through 2016.
Regulatory Environment – Pennsylvania is ranked 31st in regulatory environment and 36th overall in Forbes Best States for Business.
Pennsylvania has maintained reasonable land-use freedom with the Pennsylvania Supreme Court striking down minimum lot sizes and other zoning regulations that have the intent to exclude specific industries. It does, however, lack right-to-work legislation which can put Pennsylvania at a disadvantage when competing for new or expanding businesses.
Corporate Taxes – Minnesota ranks 46th in the United States in the Tax Foundation’s 2017 Business Tax Climate Index.
Minnesota corporate taxes are 9.8%, ranking it as one of only four states with corporate income tax above 9% in the nation.
Regulatory Environment – Minnesota is ranked #22 for regulatory environment and 13th overall in Forbes Best States for Business.
Minnesota’s minimum wage is $7.75 per hour, and employers are not permitted to take a tip credit against the minimum wage. In August, the minimum wage for large employers was raised to $9.50 per hour, while smaller business were allowed to stay at the $7.75 per hour minimum. Large businesses are considered to be those with gross revenue of at least $500,000.
States positioned for continued investment:
Corporate Taxes – Indiana ranks 8th in the United States in the Tax Foundation’s 2017 Business Tax Climate Index.
Corporate income tax rates fell to 6.5% with a half point drop due to legislation enacted last year. The Indiana corporate income tax is scheduled to be reduced to 4.9% by 2021, and the state is phasing in a reduction to personal income taxes to 3.06% over the next few years.
Regulatory Environment – Indiana is ranked #2 in regulatory environment and #8 overall in Forbes Best States for Business.
Land-use freedom is consider high in Indiana and helps keep housing prices low. On the labor front, Indiana became the 23rd state to pass right-to-work legislation in 2011-2012.
Corporate Taxes – Texas ranks 14th in the United States in the Tax Foundation’s 2017 Business Tax Climate Index.
Texas imposes a gross receipts tax in lieu of corporate income tax. This year, there was a modest rate reduction for the Margin Tax, Texas’ gross receipts tax. Although gross receipts taxes are sometimes considered more harmful than corporate income tax, Texas has no individual income tax and no state level property tax. This makes for a friendly business climate.
Texas’s Regulatory Environment – Texas is ranked #21 for regulatory environment and #6 overall in Forbes Best States for Business.
Texas is considered a top state for labor-market freedom. Worker’s compensation is optional for employers and the state has right-to-work legislation in place. Texas’ minimum wage is equal to the federal minimum wage and has anti-discrimination laws consistent with federal law.
Corporate Taxes – Utah ranks 9th in the United States in the Tax Foundation’s 2017 Business Tax Climate Index.
Utah boasts a 5% flat rate corporate income tax system, the same as its individual income tax rate.
Utah’s Regulatory Environment – Utah is ranked #6 for regulatory environment and #1 overall in Forbes Best States for business.
Utah’s labor laws are considered fairly solid and the state has passed right-to-work legislation. Utah’s minimum wage is equal to the federal minimum wage.
It’s important for companies to keep abreast of tax and regulatory changes whenever they are considering an expansion, new facility or relocation. Understanding the priorities of the company and analyzing all factors by using an unbiased source can be critical to making informed location decisions. By adding a knowledgeable and analytically capable site selection firm on your project team, a company can ensure a successful project outcome. Tax and regulatory environment is just one of the critical factors a site selection expert can help navigate, resulting in a sound financial transaction for the client and a favorable outcome for the community.
2017 Corporate Income Tax Notes
- Arizona: 6% rate lowered to 5.5%
- Indiana: 7% rate lowered to 6.5% (2011 tax reform; 4th straight year of ½% drop)
- Nevada: Combined elements of the Texas Margin Tax and the Washington Business and Operations Tax to institute a “Commerce Tax”
- New Mexico: 9% rate lowered to 6.6%
- New York: 1% rate lowered to 6.5%
- North Carolina: 5% rate lowered to 4% (2013 tax reform; multi-year phase-in)
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