Capitol Ideas

CSG Knowledge Center

Research Services

MLC Policy Resolutions

Stateline Midwest

States Perform

Policy & Research

Study of business tax burdens shows most Midwestern states below national average


by Tim Anderson ~ September 2011 ~ Stateline Midwest

In the competition for business and job growth, most Midwestern states fare better than the U.S. average on at least one measure — the burden that their overall tax structures place on businesses.
A July study by the Council on State Taxation calculates that burden using two sets of data: total state and local business taxes and private-sector gross state product. The ratio of the two then yields the Total Effective Business Tax Rate, or TEBTR.
Indiana had the region’s lowest rate, 4.1 percent (seventh-lowest in the nation). The U.S. average was 5.0 percent. Perhaps surprisingly, the Midwestern state with the highest TEBTR is North Dakota, a state that has stood out in recent years for its strong economic growth during a period of slow or declining economic activity nationwide.
But the study’s authors say North Dakota’s TEBTR of 8.6 percent is somewhat misleading because of where a large part of its tax revenue comes from — a severance tax on natural resources such as oil and natural gas that can be “shifted forward in higher prices for consumers.” As a result, North Dakota’s distribution of state and local business taxes is much different than the rest of the region’s: It relies much less on property and sales taxes, which account for the bulk of tax collections in the 10 other Midwestern states.
In Indiana, for example, close to 70 percent of business tax revenue comes from these two sources, which the study’s authors describe as “origin-based taxes on business capital that may negatively impact competitiveness.”
The report says the TEBTR is a “starting point for comparing burdens across states,” but that other factors need to be considered as well. For example, does the state tax structure favor capital-intensive manufacturers or labor-intensive service industries? And does that structure reflect the state’s economic growth strategy?
In a separate report, the council ranks states on their taxation of new investment. Its analysis focused on industries that have “location choices” (where to place headquarters or factories, for example) rather than on those that generally do not (hotels and retail stores, for example).
Ohio was given the region’s highest ranking, the result of a 2005 tax restructuring that eliminated tangible personal property taxes and that instituted a gross receipts tax in place of a corporate income/franchise tax. Wisconsin and Illinois were also listed among the 10 most competitive U.S. states.