The U.S. states have freedom to determine their tax systems and levy down taxes on their citizens in their own way. These taxes may include income tax, sales tax and property tax. It means that people living in different states of the United States have to pay differing amount as taxes. Some states depend on the property and sales taxes for revenue and totally exempt their citizens from income tax whereas others levy heavy taxes on individual income. Therefore, it is advisable to have an adequate knowledge of the tax system of different states before venturing into business anywhere.
It is important to choose relevant states with favourable tax systems for business. Low -tax -rate states attract and retain business more than the high-tax-rate states. The continuous effort of the states to improve their competitive position leads to constant instability in their tax systems (Wunder, 2008).
Several elements of a state’s tax system determine the competitiveness of a state’s business settings. The modern market is full of small and large businesses that are prepared to establish anywhere with the maximum competitive gain. States with best tax systems catch the attention of business entities and contribute to economic and employment expansion. A reasonable tax system has a significant encouraging impact on the business operations above all other matters like raw material, infrastructures, labor pool etc.
Tax competition between states is an unpleasant reality, however, it works as an effective restrain on state and local taxes. States compete to provide efficient resources, services and lowest cost to retain the businesses. The states having more competitive tax systems rank on top positions in Tax Foundation’s ‘State Business Tax Climate index’. The table below is an extract from the 2014 State Business Climate Index by presenting a comparison between the business tax climate between the state of Texas and state of New York.
Table 1: 2014 State Business Tax Climate Index Ranks and Component Tax Ranks
|State||Overall rank||Corporate Tax Rank||Individual Income Tax Rank||Sales Tax Rank||Unemployment Insurance Tax Rank||Property Tax Rank|
Different areas of tax comparison among states include five components. Considering all these five areas for comparison, the overall ranking of the states is declared. States with strong aspects in their tax system are rewarded with high scores and with weak features are penalized with low scores; however, their overall tax system determines their scores that can be compared with other states to know their standing at the national level (Drenkard, 2013). The table above reveals that Texas ranks in a higher position than New York in the overall ranking of states tax climate. New York has been ranked the last i.e.the 50th position in the State Business Tax Climate Index. Location is not only important for living and setting up business but it influences the taxes paid on business profits, sales tax levied on the customers and property taxes on one’s own and rented property. Here, we will try to find the difference in the tax rates on varied components between the state of Texas and state of New York.
Corporate Income Tax
Corporate income tax is the most influencing component of business activities in a state. New York’s average business corporate rates are 7.1% “Corporations may also be subject to AMT tax at 1.5% (3%banks), or a capital stocks tax. In New York businesses have to pay tax rates of 6.5%, 7.1%, and 4.35% on 3 brackets of entire net income up to $ 390,000” (Range of state Corporate Income Tax Rates, 2013).
In New York the AMT (Alternative Minimum Tax) on corporations ensures that every year; some minimum tax is levied on all the taxpayers. However, it seems to be an unreasonable and inefficient approach, creating a needless tax intricacy, and proves to be disadvantageous for state’s competitiveness (Drenkard, 2013).
Texas imposes a Franchise tax in the name as margin tax, on business units that have over $ 1,030,000 overall revenues. “These taxes are at rate of 1%, or 0.5% for entities primarily engaged in retail or wholesale trade, on lesser of 70% of total revenues or 100% of gross receipts after deductions for either compensation or cost of goods sold” (Range of state Corporate Income Tax Rates, 2013, Para 2).
Texas has been awarded the top rank in the annual rankings of the most competitive states of Site Selection Magazine and also honoured with the Site Selection’s 2012 Governor’s Cup for enunciating the most innovative and vast corporate facilities in a year. The state has been acclaimed for retaining a strong job creation atmosphere and lessening the tax burden on employers. “Gov. Perry’s four point plan would ensure $ 1.6 billion deduction on franchise tax for businesses units. The plan incorporates the following changes” (Arend, 2013, Para 5):
- “Five percent reduction in franchise tax rates;
- Provision of $1-million deduction for businesses with revenue up to$20 million;
- Lowered rates of EZ Form filers;
- Provision of one-time deduction of moving expenses to companies relocating to Texas from other states in the first year they pay the franchise tax” (Arend, 2013, Para 5).
According to TAB President Bill Hammond, “Government does not create prosperity, business does. By reducing the tax burden on Texas business, business will keep hiring more workers, reinvesting in their companies and driving the economic success of our state” (Arend, 2013, Para 5).
The founder and CEO of Greenleaf Book Company says that, “Taxes has been great to Greenleaf Book Group and we will continue to run our business here. If another state wants us to move, they’ll have to show us they can provide more for our business and our people” (Greenleaf, 2012, Para 10).
Individual Income tax
New York levies minimum 4.0% and maximum 8.82 individual income taxes in total eight brackets (State Individual Income Taxes, 2014).
It is one of the high top income tax rates states imposing 8.82% of income tax on its citizens. New York faces an unnecessary pull on its economy due to the tax base. It also has an AMT on individuals that is again a poor method to avert deductions and credits from removing tax liability (Drenkard, 2013).
Texas scores highest rank with seven states on this component having no individual income tax. Texas offers excellent atmosphere for business and people both. It is important to look at the growth of business and the people as well. For example, Texas exempts its citizens from individual income tax. “However, some companies have to bear the ‘Margin Tax’ on their gross profit but it is nominal in view of the burden caused by other taxes” (Greenleaf, 2012, Para 5).Hence, the people take more money home instead of paying a large amount of their income as tax. In Texas, the government is more business-friendly as compared to other states and is a magnet for many flourishing businesses and ambitious employees with talent. Texas has become a positive business ‘hub’ fostering strong business climate. It has been rated the top state for business by CNBC (Greenleaf, 2012).
A tax levied on the consumers when they purchase things is called sales tax. High sales tax rates can have an adverse impact on the business climate leading to less purchasing by the consumers or inciting them to find better shopping alternatives. This results in business moving to states with lower- sales tax leading to profit loss, jobs loss and revenue loss.
New York levies 4% sales tax and areas like food, prescription drugs and non prescription drugs are exempted from it. Texas has a 6.25 sales tax rate on taxable services. It exempts food, prescription drugs and non prescription drugs from sales tax. New York has a high local option sales tax rate with 4.48% that adds to the tax rate faced by the end users (State Sales Tax Rates and Food and Drug Exemptions, 2014).
Texas offers sales and use exemptions to commercial businesses that are primarily manufacturing on the purchase of machinery and equipments used in the manufacturing process and on natural gas and electricity. Texas is one of the lowest tax burdens in the country without any corporate income tax and individual income tax (Low Taxes, 2014).
Texas does not levy property tax at the state level; however, the local governments and districts with special taxing systems can levy taxes on the real and tangible property. Texas offers many property tax exemptions to competent businesses (Low Taxes, 2014).
In New York, the local governments levy the property tax on real property. The revenue collected through these taxes is utilized for schools, police and fire services, road maintenance and other services. The localities determine the tax rates based on the local budget for the year. Some of the counties levy the highest property tax rates in the nation. However, there are some exemptions for the senior citizens, veterans, people with documented disabilities and owners of residential property using it as their main residence. In the same manner, lawmakers of the states like New York ranking low in the tax system climate assume that tax and regulatory climate is of no significance in determining the economic growth of the state (A Comparative Look at Taxes, 2011).
Unemployment Insurance Tax
Unemployment Insurance (UI) tax is levied on the employers to benefit workers who are recently unemployed. The worst aspect of this tax system is its devastating impact on those businesses which are struggling to survive. New York does not have a favourable Unemployment Insurance tax climate. It has a more complex modus operandi, includes more factors in the charging methods, and becomes an intricate system with various add-ons and surtaxes. New York also has a solvency tax system known as the subsidiary tax through which the employers are bound to support the state in case of the paucity of unemployment funds.
Texas has reduced the UI tax to 1.66% for the year 2014 from the 1.82% in 2013for all employers. This decrease is in UI tax percentage indicative of the constant economic development in Texas (Average unemployment taxes decrease in 2014, 2013).
Some economic experts believe that the politicians like Perry may claim that their economic success is the result of their low tax and light regulation system, however, the economic growth of the state is a combination of the low tax and low regulation climate with financial back-up, the strength of research institutions and construction of significant infrastructure. New York may cling to the high-value added section of the economy through certain mediums like: quality of life, dense concentration of entrepreneurship, venture capital and efficient labor team, however, they cannot satisfy the middle class with no sensible tax and regulatory plan (Is Taxas’ Economy Really Better Than California’s?, 2013).
About 700 top Chief Executive Officers from all over the nation have awarded top rank to Texas for a congenial business climate. This is the ninth consecutive year that Texas has the top rank in the list of the Chief Executive Magazine’s survey of Best and Worst States (Why Texas is Good for Business, 2013).
An efficient way to develop the state’s competitiveness is to methodically improve the state’s business tax environment and not rely on the making lucrative tax incentives and subsidies.
There are certain factors to be considered while making changes.
States with higher and complicated tax systems impose extra burden on the consumers with higher prices, employees with lower salaries and paucity of jobs. The shareholders also have to bear with lower dividends and share value. Secondly, the changes made in the tax systems change the competitive position of the in view of its neighbouring states and affect the national standing of that particular state for living or business purposes. States willing to enhance their entrepreneurial capability may take advantage of the higher tax rates of the other states and catch the attention of businesses (Drenkard , 2013).
The business tax climate of Texas is superior to New York as it levies fewer burdens on the business entities. States need to look at the growth of business and the people both for competing strategically towards economic growth. Texas provides a congenial atmosphere for the people and business as well. In Texas, the government is more business-friendly as compared to other states and has become a magnet for many flourishing businesses and ambitious employees with talent. Texas is one of the lowest tax burdens in the country without any corporate income tax and individual income tax. It has become a positive business ‘hub’ fostering strong business climate. Texas stands at peak in view of people, talent, and business in comparison to other states. The success lies in the free market policy attracting more and more business entities from other states.
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