Business tax rankings: Misinformation continues

Tax Foundation misrepresents Iowa once again.

The Tax Foundation is at it again. The corporate-funded think tank released their latest bogus measure of state tax competitiveness, the 2019 State Business Tax Climate Index (SBTCI), on October 22nd.  The major features of the SBTCI remain unchanged from earlier editions. The fundamental criticisms of their methodology remain as salient as ever.

The State Business Tax Climate Index purports to measure a state’s “tax competitiveness” but the index bears very little relationship to what businesses actually pay in taxes in one state versus another. Of the 10 supposedly “worst” states in terms of business taxation according to the latest Tax Foundation ranking, 6 (including Iowa) actually ranked among the 21 states with the lowest business taxes, including two among the lowest 10, according to of the Council on State Taxation.

The Tax Foundation ranking (they put Iowa as the 9th worst state) differs dramatically from more defensible analyses that simply measure the average effective corporate income tax rate. The Council on State Taxation produces periodic estimates of all business taxes as a share of private sector Gross State Product and has consistently found Iowa to be among a sizable group of states right in the middle. In fact, their latest report shows that only 17 states have a lower effective business tax rate than Iowa, while 30 states have a higher rate.

The SBTCI is a combination of 124 components of state tax systems, giving substantial emphasis to some components that cannot plausibly affect tax competitiveness, while ignoring features that have a large impact on business taxes (single-factor apportionment and deduction of federal corporate income taxes). The last problem is particularly salient for Iowa. Iowa offers single-factor apportionment, which can drastically reduce a corporation’s Iowa tax if they export much of their production. And Iowa is one of the few states that allow corporations to deduct part of their federal income taxes on their state return. These two features help explain why the Tax Foundation ranks us poorly while others show us with average, or lower than average, taxes on business.

There are a few changes in the 2020 version of the index. The Tax Foundation now penalizes states for attempting to rein in corporate tax avoidance in two ways. First, they penalize a state’s score if they conform to the Global Intangible Low Taxed Income (GILTI) provisions of the Tax Cuts and Jobs Act (TCJA) of 2017, which are intended to reduce the incentive to shift corporate assets abroad. State conformity would in fact help states avoid some of the corporate tax avoidance that has been eroding state revenues, due to the ability of corporations to shift profits overseas. But restoring revenues in this way is a bad thing, according to the TF. The second new feature is a penalty for states that conform to the net interest limitation in TCJA. This provision limits the ability of corporations to deduct interest expense, but apparently the TF thinks the deduction should be unlimited.

Iowa has chosen to conform to both of those provisions, for which the state’s taxpayers should be thankful. That the Tax Foundation has penalized Iowa in the rankings for trying to close corporate loopholes is just another reason to ignore their rankings.

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Peter Fisher is research director of the nonpartisan Iowa Policy Project. pfisher@iowapolicyproject.org