Playing the state tax lottery
taxnews
There have been a number of surveys conducted that attempt
to measure the desirability of doing or investing in business in
one state versus another.
While they examine different factors, rec
ent polls by the Small Business & Entrepre
neurship Council, the Tax Foundation, and
Big Four firm Ernst & Young and the Council
on State Taxation all agree on the importance
of taxation in making it attractive to do busi
ness in a particular state.
Analysts say that the highestintheworld
U.S. tax rate has affected the competitive
ness of U.S.based companies, making the
U.S. a less attractive place to start or main
tain a business. The same analysis, applied
to the states, indicates the importance of tax
as a factor in deciding to operate a business
within a particular state.
“No one argues that taxes don’t matter,”
said Joseph Henchman, vice president of
state projects at the Tax Foundation. “Back
in the day, people did argue over this, espe
cially when we had a top federal rate of 90
percent, and then 70 percent. An extra couple
of percent at the state level didn’t really mat
ter. Now, especially for small business where
the individual rate has come down into the
30s, what states offer matters a lot more.”
“Higher taxes have an impact on a state’s
competitiveness,” agreed Raymond J. Keat
ing, chief economist for the SBE Council. “If
anything, the intensity is even more on the
state side, because it’s easier for entrepre
neurs to move from California to Nevada than
from one country to another.”
BY ROGER RUSSELL
Local tax rates matter more to businesses than ever
BEST V. WORST
the five best state tax systems:
1. South Dakota
2. Texas
3. Nevada
4. Wyoming
5. Washington
the worst:
45. California
46. Maine
47. Iowa
48. New York
49. New Jersey
50. Minnesota
51. District of Columbia
Source: Business Tax Index 2011,
SBE Council
corporate tax, individual income tax, sales
tax, unemployment tax and property tax.
“Of course, taxes are just one part of the
equation,” explained Henchman. “Other
things matter too, such as education, trans
portation, quality of state services, and regu
lation. The one thing that sets taxes apart is
that it’s something that legislators can act on
and change immediately.”
STATE RANKINGS
The SBE Council’s Business Tax Index 2011
ranks the 50 states and the District of Colum
bia according to the costs of their tax systems
for entrepreneurship and small business. It
is based on 18 different tax measures — in
cluding top personal income tax rate, top
individual capital gains rate, top corporate
income tax rate, top corporate capital gains
tax rate, and any added income tax on S cor
porations — and combines those into one
tax score. Among the taxes it includes in its
scoring are income, capital gains, property,
death/inheritance, unemployment, and vari
ous consumptionbased taxes.
SPARKING RELOCATION
Most mass job relocations are from one U.S.
state to another, rather than to an overseas lo
cation, noted Kail Padgitt, author of the State
Business Tax Climate Index. “State lawmak
ers are right to be concerned about how their
states rank in the global competition for jobs
and capital, but they need to be more con
cerned with companies moving from Detroit
to Dayton, Ohio, rather than from Detroit to
New Delhi,” he said.
For example, he cited the decision by
Californiabased Intel to build a multibil
liondollar chipmaking facility in Arizona in
2005, due to its favorable corporate income
tax system. And earlier this year, Northrop
Grumman chose to move its headquarters
to Virginia, instead of Maryland, due to the
better business tax climate.
Personal income tax rates influence busi
ness far more than generally assumed, ac
cording to the SBE study, since more than
92 percent of businesses file taxes at the in
dividual rate. High state unemployment tax
rates increase the relative cost of labor versus
capital, and provide incentives for laborin
tensive businesses to flee hightax states.
“Each tax hits business directly or indirect
ly, distorts the workings of the marketplace,
and diminishes economic efficiency by shift
ing resources from the private sector (guided
by prices, profits and losses), into government
(guided by politics and special interest pres
sures),” said Keating, who authored the study.
“In the end, though, all taxes matter, whether
imposed at the federal, state or local level of
government. They matter to consumers, en
trepreneurs, investors and businesses. They
matter in terms of a state’s competitiveness.
And they matter when it comes to economic
growth and job creation.” AT
IRS BegInS enfoRcIng
RetuRn PRePaReR RuleS
WASHINGTON, D.C. — The Internal Revenue Service has begun taking steps to
stop tax preparers with criminal tax convictions or permanent injunctions from
preparing tax returns, sending letters to
19 tax preparers proposing to revoke
their Preparer Tax Identification Numbers.
This is just one of several recent moves
to improve the quality and oversight of
the tax preparation industry. More than
700,000 tax preparers nationwide have
registered with the IRS and obtained
Preparer Tax Identification Numbers, or
PTINs. This nine-digit number must be
used by paid tax return preparers on all
returns or claims for refund. Paid preparers must renew their PTINs annually to
legally prepare tax returns.
By comparing the new PTINs with a
database managed by the IRS’s Office of
Professional Responsibility, the IRS was
able to identify 19 tax preparers who
applied for PTINs and either failed to
disclose a criminal tax conviction or have
been permanently enjoined from preparing tax returns. A permanent injunction is
a court order used by the Department of
Justice to stop a preparer who repeatedly
prepares erroneous or fraudulent federal
tax returns.
The IRS sent letters to all 19 individuals proposing revocation of their PTINs.
Preparers facing revocation have 20 days
to file a written response and provide
supporting documentation as to why
their PTIN should not be revoked.
With the end of the tax-filing season,
the IRS also will initiate a review of tax
returns that were prepared by preparers
who used an identifying number other
than a PTIN, did not use any identifying
number, or did not sign tax returns they
prepared. The agency will send notices
to those preparers who used improper
identifying numbers. The IRS is also piloting methods to help identify returns that
appear to be professionally prepared but
are unsigned by the preparer.
The IRS is still registering approximately 2,000 preparers a week. Anyone who
prepares for compensation all or substantially all of any federal return or claim for
refund must register for a PTIN.
