Unlike the federal government, which has been unable to enact corporate tax reform, state and local level reform is alive and well. Based on a recent Bloomberg BNA study of 100 tax professionals at U.S. large corporations, governments appear to be shattering their stereotypical image by swiftly enacting new laws to meet their budgetary or political goals. Whether 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’re left with the cumbersome task of interpreting and implementing those changes into their operations in almost real time.
At the same time, no consistency across states means even more operational resources are required to remain in compliance. This is an especially daunting task for those still using manual spreadsheets. Surprisingly, Bloomberg BNA research shows that 87% of state tax professionals use manual spreadsheets to calculate potential tax implications – a potentially costly and risky endeavor that can be plagued with human error.
At first glance, the dizzying array of recent tax law changes and the burden put on businesses to keep up with them appear to have a significant and adverse impact on businesses.
However, as the saying goes, if life (or in this case, the government), gives you lemons, make lemonade. That is exactly what many progressive companies such as Tesla and Mercedes are doing taking advantage of incentives resulting from state and local tax reform. But before jumping on the tax savings bandwagon, businesses need to keep in mind that just because an incentive looks good on the outside, does not mean it is. In order to fully reap the benefits of available tax incentives, companies need a complete picture so they can weigh the overall impact of a potential tax savings opportunity.
When States Compete, Businesses can Win
A handful of states or cities have already or plan to increase corporate income tax in the past year, but the vast majority of states are aggressively changing their tax structures to encourage business investment. (See box, below.) 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 are 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 competing for businesses. The result is millions and even billions of dollars in potential tax savings.
Local Corporate Tax Changes to Come
- The city of Chicago started discussions to possibly implement a new corporate income tax to address its $30 billion pension crisis.
- Pennsylvania is looking to move to a combined/unitary basis after decades of being a separate filing state.
- Nevada, a state famous for no tax, is now introducing a commercial activity type of tax.
- Massachusetts was slated to join the handful of states deemed as “unfriendly” when it comes to corporate income taxes with the elimination of a popular corporate tax deduction. In a surprising turn of events, government officials reversed course after hearing complaints that the repeal would worsen the impression that Massachusetts is an unpredictable place to do business.
For example, Mercedes-Benz USA announced it would move its domestic headquarters from New Jersey to Georgia, which offered the automaker an incentive package valued at around $50 million. Similarly, last year, Nevada offered Tesla a $1.3 billion incentive 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. And it seems the more a company makes, the more likely it will get tax incentives. Bloomberg BNA research shows that company size plays a significant role in attracting tax relief. Among businesses that employ upwards of 10,000 workers, 91% report receiving incentives, compared to only 70% of those under the 10,000-employee threshold. Manufacturers in particular are regularly targeted by state officials, with 91% having been approached with economic incentives.
Some larger companies will be directly offered state tax incentives to move business into a state. But companies of all sizes and in all industries can still benefit from the evolving state and local tax landscape. Unlike the Teslas or the Mercedes of the world, most businesses will need to actively seek out potential tax savings.
Let’s consider, for example, a company considering a new facility in Chicago or a possible relocation to Chicago. The city of Chicago, in fact, has started discussions to possibly implement a new corporate income tax to address a $30 billion pension crisis. On the surface, a corporate income tax in Chicago would appear to be an instant deal killer. However, there are a variety of other factors that should be taken into consideration before making a final relocation decision. Perhaps the city has property and sales tax incentives that would offset a potential corporate tax. Or maybe the political environment for a specific vertical industry is a critical factor in a relocation decision.
In the Chicago example, even if the city imposes a corporate income tax, the reduced Illinois state tax rate could actually make Chicago an ideal place to do business. However, a company must have the ability to view the impact of an operational decision from a holistic perspective so they can model out various scenarios, before actually pulling the trigger on such an important decision. Savvy businesses know this, and in response, have been pouring resources into their state and local tax operations in an effort to obtain the “holy grail” of a holistic view of data.
Ken Crutchfield is vice president of software at Bloomberg BNA.