Data in a recent study highlights the stark divergence in effective tax rates for new and mature companies across states. New companies choosing a location for their headquarters may want to steer clear of Washington and Texas, where mature companies have a significant tax advantage.
Recently, the Tax Foundation and KPMG published a report on how the tax burden varies for different company types across the 50 states and Washington, D.C. We delved into the report’s data to discover which states might be the most attractive destinations for company headquarters.
It’s hardly surprising that New York has the highest effective tax rate on corporate headquarters, while Wyoming and Nebraska have the lowest burdens for new and mature companies, respectively. However, the gaps between the tax levels for new and mature companies in each state were striking.
In the majority of states, mature companies have the advantage with lower effective tax rates. Washington and Texas tie for having the largest gap favoring mature companies, 6.5%.
However, 18 states provide new companies with attractive incentives and effective tax rates lower than those for mature companies. In fact, the effective rate for a mature company with its corporate headquarters in New Jersey is more than six times higher than that for a new company.
Alabama and Iowa provide the most equitable tax environments, with less than 0.5 percentage points separating the effective tax rates for new and mature companies in each state.
A number of variables should be considered when calculating the effective tax burden. Often, the statutory tax rate is just the starting point. A company must also consider incentives, apportionment, throwback rules and several other factors that all can impact the effective tax burden. A state may appear to have a low tax rate, yet still be the most costly location for a company to place its headquarters. And, of course, many companies will still need to pay taxes to other states because of nexus or sales tax.
The report comes at time when several high-profile companies, most notably GE, are considering moving their headquarters to states with more favorable tax laws. GE has said that it will make a final decision regarding the move by the end of the year.
The table below highlights the effective tax rates (and differences) for each of the states and Washington, D.C.