Neither among the best, nor among the worst, Washington shows mixed results in the Tax Foundation’s 2021 Location Matters analysis of business tax burdens. Of the various interstate measures of taxes, we like best the approach taken by Location Matters. As we wrote in 2015, Location Matters makes a significant contribution to our understanding of how taxes affect different industries at different levels of their maturity. The analysts write (forgive the long excerpt) of the methodological challenges.
Widespread interest in corporate tax burdens has resulted in a range of studies produced by think tanks, media organizations, and research groups. None of these other studies, however, provide comparisons of actual state business tax costs faced by real-world businesses.
Some studies compare total tax collections or business tax collections per capita or as a percent of total tax revenue. The shortcoming of this approach is that collections are not burdens: many business taxes are collected in one state but paid by companies in other states. Comparing state collections thus does not accurately portray the relative tax burden that real-world businesses would incur in each state.
Some studies assess the relative value of tax incentives available for different types of businesses, such as new job tax credits, new investment tax credits, sales tax exemptions, and property tax abate- ments. However, these studies can give the incorrect impression that all businesses in a state enjoy such incentives. They also do not typically account for increased tax rates for mature businesses that may be required to support such incentives.
Some studies, including the Tax Foundation’s widely cited annual State Business Tax Climate Index, define model tax structure principles and measure the state’s tax code relative to those principles. The State Business Tax Climate Index is a useful tool for lawmakers to understand how neutral and efficient their state’s tax system is compared to other states and to identify areas where their system can be improved. However, this does not address the bottom line question asked by many business executives: “How much will our company pay in taxes?”
An individual firm considering expansion frequently calculates its tax bill in various states, but these calculations are not often released publicly and are usually confined to a small number of states.
To fill the void left by these studies, the Tax Foundation collaborated with U.S. audit, tax, and advi- sory firm KPMG LLP to develop and publish a landmark, apples-to-apples comparison of corporate tax costs in the 50 states. Tax Foundation economists designed eight model firms—a corporate headquarters, a research and development facility, a technology center, a data center, a capital-in- tensive manufacturer, a labor-intensive manufacturer, a shared services center, and a distribution center—and KPMG tax professionals calculated each firm’s tax bill in each state. This study ac- counts for all business taxes, including corporate income taxes, property taxes, sales taxes, unemployment insurance taxes, capital stock taxes, inventory taxes, and gross receipts taxes. Addition- ally, each firm was modeled twice in each state: once as a new firm eligible for tax incentives and once as a mature firm not eligible for such incentives.
Here’s how the eight firms fare in Washington.
None of the firms cracks the top ten of lowest effective tax rate, though mature distribution centers and data centers come in 11th and 12th respectively. New labor-intensive manufacturing, technology centers and R&D firms rank among the bottom ten, No. 43, No. 41. and No. 41 respectively.
Of the state’s business tax structure the Tax Foundation writes,
In lieu of a traditional corporate income tax, Washington imposes a gross receipts tax called the Business & Occupation (B&O) tax. The structure of this tax, which imposes different rates on distinct industry categories, incentivizes vertical integration as firms seek to claim an industry classification subject to a lesser tax burden and reduce their exposure to tax pyramiding. Because our model firms represent “typical” examples of their type, they fare better under gross receipts taxation than would many real-world firms, since Washington’s B&O tax is indifferent to a firm’s actual profit margins, and raises input costs.
The new technology center sees a high comparative burden, ranking 41st for its firm type, driven in part by the sales taxation of business inputs. However, both variations of technology centers expe- rience very high burdens from the state’s gross receipts tax. The mature firm sees a B&O payment that is more than two and a half times the median corporate income tax burden. Manufacturers are also heavily burdened by this tax. On the other end of the spectrum, the mature distribution center ranks 11th, one of the few firm types that sees lower-than-average overall burdens.
Apportionment under the B&O tax is based on receipts and uses benefit sourcing for service income, both of which favor many of the firms in our study, but the state also has a throwout rule which increases in-state taxability. Washington’s property tax base includes equipment, though the sales tax base expressly excludes manufacturing machinery, servers, and research and develop- ment (R&D) equipment. Unlike in states with a traditional income tax, however, these purchases do not reduce Washington taxable income.
Much more detail in the report.