From Site Selection magazine, July 2009

How Does Your State
Tax — and Spend?
Editor Mark Arend
Illustration by Bob Gravlee

AMC Chair Rick Little is exactly correct in his letter to the membership and readership at large with his list of topics about which good site selectors should be more than conversant. One of them, he notes, is taxes. In past columns, I've made the case that an area's competitiveness goes down in proportion to its tax burden going up. But there's another side to taxes it may be worth thinking about these days.
      You're probably in a state with a corporate income tax, because the majority of states have one. If you're not, you may have operations in a state that does. Find out whether your state couples that tax with the federal corporate income tax – in other words, uses the same depreciation deduction rules for state filing as for federal. As the Tax Foundation pointed out June 18th on its Tax Policy Blog at www.taxfoundation.org, the federal government in 2009 extended a generous depreciation deduction as part of the economic stimulus package. But some states are deciding to "decouple" state and federal procedures for calculating depreciation in the hope they can realize more tax benefit. Florida is the latest to do so.
      There are five reasons decoupling is unwise, and the blog outlines them succinctly. Two relate directly to your ability to proffer advice about site locations.
      They are, according to Joseph Henchman, the Tax Foundation's Tax Counsel and Director of State Projects: (1) "States play an important role in determining the extent of the economic stimulus … The decision of the states to also adopt bonus depreciation provisions for state tax purposes has implications for the potency of the provision and the resulting economic stimulus. Not only does failure to couple to the federal change reduce the investment incentive associated with the bonus depreciation provision, but the presence of differences between federal and state depreciation systems can act to discourage businesses from using the federal provisions." And (2) "The extent to which a state welcomes business owners and entrepreneurs making decisions about where to locate investment capital, equipment, and jobs depends on a number of factors that the Tax Foundation attempts to gauge in our annual State Business Tax Climate Index. States can be termed 'unfriendly' if they consistently move the state tax system away from a sound tax policy, such as with increased complexity, retroactivity, high burdens, economic distortions, and a lack of transparency."
      What's more, he adds, "Decoupling is a move away from sound tax policy, because it increases tax burdens, reduces stability, and exacerbates an already complex income tax code. Businesses should be wary of states that have decoupled, since it signals that the state cares more about illusive (and mistaken) short-term revenue savings instead of long-term economic growth. While remaining coupled or recoupling is not in itself a signal of welcoming new investment, it signals a commitment to principled tax policy."
      Meanwhile, consider this insight from a source in Managing Editor Adam Bruns' Investment Profile on Missouri about the importance of smart investing on the part of state and federal government, as in keeping sharp the tools already in the toolbox: "The United States must step up its commitment to strong research universities in order to remain competitive," says Mark S. Wrighton, chancellor of Missouri's Washington University. "It's still the case that people from around the world, especially Asia, see the U.S. as having the strongest system of higher education. But we cannot be complacent." Indeed, even in states playing short-term tax cards, investment in what matters still matters. Adam's Missouri profile and our broader coverage of technology centers in the U.S. and elsewhere throughout this issue demonstrate that where innovation and location intersect, it's all good.

      Till next time,
      Mark Arend


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