Overall business taxes are lowest in Delaware and highest in Alaska, according to a study from economic consulting firm Anderson Economic Group. But how much a company pays depends on the kind of business it is.
Businesses in Delaware paid 5.1 percent in state and local taxes in 2011, while those in Alaska paid 25.2 percent, the report said. The states were ranked according to the percentage of businesses’ operating margin that states taxed. Operating margin is, broadly, profit before the business pays its interest on loans and taxes.
Ohio was ranked 33rd in the study, with businesses paying 11.1 percent of their gross operating margin in state and local taxes in 2011.
That puts it “pretty near the middle of the pack,” said Alex Rosean, one of the authors of the study.
The report also showed that U.S. businesses paid more than $623 billion in state and local taxes in 2011, the latest year for which figures were available.
The largest percentage of taxes paid by the businesses nationwide are property taxes, general sales taxes and unemployment insurance taxes which accounted for 68 percent of the total state and local taxes paid by businesses in 2011, according to the report.
Rosean said Delaware is particularly low in how much it taxes businesses because it has no corporate or individual income tax, a low property tax and a low unemployment compensation tax.
“They also don’t have a sales tax,” Rosean noted, adding that the economy in Delaware has been doing better than many other states, allowing the First State to keep taxes down.
As for Alaska, Rosean said that state also has a low individual income tax and no sales tax. But it has a relatively high corporate income tax, and, he added: “They have an absolutely gigantic severance tax, a tax on mineral extraction. As soon as a barrel of oil leaves the ground, they tax it.
“It’s smart on their part because businesses can’t say they are going to move to Colorado and drill for oil there,” he said.
But Alaska was losing out to drilling in other states like North Dakota, Pennsylvania and Texas, and just this year, decided to lower the taxes on oil companies in a bid to lure them back. This was labeled risky strategy by some opponents in Alaska, which depends deeply on oil revenues to fund the state budget.
Ohio, meanwhile, Rosean said, recently did away with its corporate income tax, but it ranks high in other areas of taxes. Those include business license fees and the individual income tax on business income that some owners pay on their business income.
Additionally, Rosean said, Ohio is one of only a handful of states that has a gross receipts tax. Also, he said, Ohio businesses have a high tax burden when it comes to unemployment insurance taxes — payroll taxes that businesses pay to fund unemployment insurance claims.
“Ohio had a tough economy for a while,” Rosean said, noting that high unemployment led to increased unemployment insurance taxes.
Matter of control
Rosean said business taxes “are not the only factor that affect a business climate. … But business taxes are one of the few factors that state and local government have [direct] control over. That’s why [the taxes] get so much publicity.”
A non-tax factor often valued by businesses is the availability of skilled workers, Rosen noted.
Peter Fisher, an economist and author of the report Grading Places: What Do the Business Climate Rankings Really Tell Us? said the Anderson Economic Group study is on target.
“This one actually tries to measure the amount businesses pay,” Fisher said. “They are looking at the right things, not mashing all the numbers together and trying to come up with a meaningful index.”
Fisher favorably compared the Anderson report to one done last year by the accounting firm of Ernst and Young, which also found Delaware to be the lowest business tax state.
Fisher said the trouble with such studies is that they often don’t differentiate between industries. For example, the severance tax is not paid by other kinds of manufacturers in Alaska, and if you take that tax out of the equation, business taxes would be lower overall.
“The idea that there’s a single business plan isn’t right,” he said. “But as a rough estimate, it isn’t bad.”
The study found that the average of all states, as a percentage of operating margin, is 10.2 percent.
The lowest tax states: Delaware: 5.1 percent; Oregon, 5.7; Utah, 6.2; Louisiana, 7.3; Georgia and South Dakota, 7.8.
The highest business tax states: Alaska: 25.2 percent; North Dakota, 16.8; Wyoming, 15.7; Vermont, 14.6; West Virginia, 14.2.
Beacon Journal business writer Katie Byard contributed to this report.