Tax

How to Find America’s Tax Havens

KPMG ranks San Juan, Baltimore, and Atlanta as the cities most favorable to companies from a tax standpoint. The costliest? San Jose, New York City...
Alan RappeportJuly 30, 2008

Companies feeling a severe tax bite in urban centers like New York or Chicago may find much cheaper pastures in some of America’s very own tax havens, such as San Juan or Saginaw, Mich.

A new report by the audit, tax, and advisory firm KPMG examined the different types of taxes that companies face in various U.S. cities, creating a national ranking system based on measurements of income taxes, capital taxes, sales taxes, property taxes, and local business taxes.

Globally, the U.S. performed relatively well, ranking fifth in the favorability of its overall business tax structure. It trailed Mexico, the Netherlands, Canada, and Australia.

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“Cities across the United States recognize that attracting and retaining businesses of all sizes is important for a vibrant local economy,” said KPMG’s Hartley Powell. “Certain cities are leaders in developing a tax environment that encourages business development, and tax costs are a key consideration in the site selection process.”

Of America’s largest cities — those with metropolitan-area populations larger than 2 million for the study’s purposes — the one most favorable venue for companies was Puerto Rico capital San Juan. It had a total tax index score of 46.6, indicating tax costs 53.4 percent below a national average set at 100. After San Juan came Baltimore, Atlanta, and Tampa, with scores of 92.1, 95.1, and 98.1, respectively.(see interactive map below)

San Juan’s top ranking is the result of an exemption from U.S. federal income taxes, big incentives to encourage export production, and low wages that mean less social security and Medicare costs.

At the scale’s other end, San Diego, New York City, and San Jose ranked 19th, 20th, and 21st, with scores of 107.7, 109.2 and 112.2, respectively. Miscellaneous taxes can add up. In San Jose, for example, the city levies a tax of $18 per employee, to a maximum tax of $25,000 per year.

The U.S. corporate income tax rate is 34.5 percent, third-highest in the world. Within the U.S., however, states and cities have various programs to attract businesses. Among those are income tax credits designed to spur investment and development, liberal rules allowing for state taxes to be deducted from federal tax requirements, and rules that allow firms to offset higher sales taxes with income tax reductions.

KPMG notes that one recent trend in the U.S. has been for states to tax gross income instead of net income. Michigan, Ohio, and Texas recently adopted this policy, which allows them to claim having no state income tax while taxing gross receipts — based on income — with limited deductions. The study also bemoaned America’s tax credit program for research and development, which has been in limbo and left firms that specialize in R&D in a state of “great uncertainty.”

The Tax Map

KPMG ranked the U.S. cities with the tax structure that are best for businesses. The index is based on the national average of 100 (a level illustrated by Providence, R.I.) and represents the total tax burden of operating in each city. Total effective tax rate, as calculated by KPMG, is the sum of the corporate income tax rate; other corporate taxes such as sales, property and local taxes; and statutory labor costs, as a percentage of net income before income tax. Click on the blue bubbles to see how the top 21 cities with metropolitan-area populations greater than 2 million people fared.