Location Matters and Federal Tax Developments Keynote presentation for The 94 th Annual Meeting of the Montana Taxpayers Association December 2 nd, 2015 Scott Greenberg Analyst

Location Matters for Montana

Location Matters Scott Greenberg Analyst There are many ways to rank state tax systems 1.According to the Tax Foundation’s 2016 State Business Tax Climate Index, Montana has the 6 th best tax climate for businesses among states. This is a measure of how well-structured states’ tax systems are. 2.According to the Tax Foundation’s 2015 Facts and Figures, Montana had the 21 st lowest state and local tax collections per capita in This is a measure of how much is collected by Montana state and local governments. 3.According to the Tax Foundation’s 2011 Annual State-Local Tax Burden Rankings, Montana residents face the 13 th lowest state and local tax burden. This is a measure of what percentage is paid by state residents in all state and local taxes, including those imposed by other states.

Location Matters Scott Greenberg Analyst Location Matters measures how much businesses actually pay in taxes in each state Location Matters is an apples-to-apples comparison of corporate tax costs in the fifty states. This helps answer the bottom-line question asked by business executives: “How much will my company pay in taxes?” It allows us to see which taxes are the most significant for different types of businesses. It sheds light on the cost and the significance of tax incentives. It illustrates how structural aspects of state tax codes can be as important as top-line tax rates.

Location Matters Scott Greenberg Analyst The study analyzes seven model firm types Corporate headquarters R&D facility Retail store Capital-intensive manufacturer Labor-intensive manufacturer Call center Distribution center

Location Matters Scott Greenberg Analyst We calculate tax rates for new and mature firms Many states give large incentives to new firms, often to the disadvantage of established firms. For instance, in Mississippi, new firms face lower effective tax rates than mature firms for every firm type besides retail stores:

Location Matters Scott Greenberg Analyst A few key findings of Location Matters 1.Statutory tax rates only tell part of the story Montana’s corporate income tax rate is 6.75 percent, but firms pay between 2.3 percent and 7.3 percent of their income in corporate income taxes. 2.Corporate income taxes are just one part of the corporate tax burden In Montana, only 2 of the 14 sample firms paid more in corporate income taxes than in property taxes and unemployment taxes. 3.Different firms experience dramatically different effective tax rates In Montana, a sample mature labor-intensive manufacturing firm faced an effective total tax rate of 9.8 percent. Meanwhile, a sample new call center faced an effective tax rate of 26.6 percent.

Location Matters Scott Greenberg Analyst The top-line results for Montana Although Montana’s tax system is relatively well-structured and imposes a relatively low burden, some firm types face higher rates than average.

Location Matters Scott Greenberg Analyst Contributing factors to Montana’s results Statutory Rates 1.Mid-range corporate income tax rates 26 th highest top rate, as of July Mid-range unemployment insurance tax rates 18 th highest minimum rate, 37 th highest maximum rate, as of July Mid-range property tax collections 18 th highest state and local property tax collections, FY No state sales tax

Location Matters Scott Greenberg Analyst Contributing factors to Montana’s results Other features 1.Few targeted incentives for new firms 2.Three-factor apportionment formula 3.“Income producing activity” sourcing rules for services 4.Property tax on equipment

Location Matters Scott Greenberg Analyst Montana vs. Neighboring States Corporate Headquarters, Mature Wyoming: 6.9% (1 st ) South Dakota: 8.2% (2 nd ) Montana: 9.0% (3 rd ) North Dakota: 9.6% (4 th ) Idaho: 13.7% (25 th )

Location Matters Scott Greenberg Analyst Montana vs. Neighboring States Research and Development Facility, Mature Wyoming: 6.2% (5 th ) North Dakota: 6.9% (6 th ) South Dakota: 7.4% (7 th ) Idaho: 12.2% (27 th ) Montana: 13.0% (32 nd )

Location Matters Scott Greenberg Analyst Montana vs. Neighboring States Retail Store, Mature Wyoming: 6.6% (1 st ) South Dakota: 8.1% (2 nd ) North Dakota: 10.9% (4 th ) Montana: 12.9% (8 th ) Idaho: 15.6% (26 th )

Location Matters Scott Greenberg Analyst Montana vs. Neighboring States Capital-Intensive Manufacturer, Mature Wyoming: 4.1% (3 rd ) South Dakota: 4.2% (5 th ) North Dakota: 9.0% (18 th ) Idaho: 13.9% (36 th ) Montana: 14.5% (40 th )

Location Matters Scott Greenberg Analyst Montana vs. Neighboring States Labor-Intensive Manufacturer, Mature Wyoming: 4.3% (1 st ) South Dakota: 6.0% (8 th ) North Dakota: 9.1% (25 th ) Montana: 9.8% (28 th ) Idaho: 11.7% (37 th )

Location Matters Scott Greenberg Analyst Montana vs. Neighboring States Call Center, Mature South Dakota: 12.8% (5 th ) Wyoming: 14.4% (8 th ) North Dakota: 16.8% (18 th ) Montana: 20.3% (28 th ) Idaho: 23.1% (36 th )

Location Matters Scott Greenberg Analyst Montana vs. Neighboring States Distribution Center, Mature Wyoming: 12.9% (1 st ) South Dakota: 23.1% (19 th ) North Dakota: 25.2% (21 st ) Idaho: 25.6% (22 nd ) Montana: 26.3% (24 th )

Federal Tax Developments

Scott Greenberg Analyst What’s Going on in Federal Tax Policy? 1.Negotiations over tax extenders 2.Funding for the Highway Trust Fund 3.Looking forward to comprehensive tax reform

Federal Tax Developmen ts Scott Greenberg Analyst The Urgency of Federal Tax Reform 1.A tax code that hinders investment and growth 2.Excessive tax complexity 3.Over 150 narrow provisions targeted at special interests

Federal Tax Developmen ts Scott Greenberg Analyst Candidate Tax Plans

Federal Tax Developmen ts Scott Greenberg Analyst Candidate Tax Plans

Federal Tax Developmen ts Scott Greenberg Analyst Similarities Between Candidate Tax Plans 1.Eliminate itemized deductions 2.Move to full expensing of capital investments 3.Lower corporate income tax rate 4.Lower individual income tax rates 5.Move to territorial tax system 6.Eliminate the Alternative Minimum Tax and the Estate Tax

Federal Tax Developmen ts Scott Greenberg Analyst Four Approaches to Tax Reform 1.Cut rates across the board and increase the standard deduction Bush, Trump, Santorum 2.Cut rates across the board, eliminate taxes on capital gains and dividends, and increase refundable credits Rubio 3.Cut rates across the board, eliminate provisions for low-income taxpayers, and replace the corporate tax with taxes on shareholders Jindal 1.Create a flat individual rate and replace the corporate income tax with a value-added tax Rand Paul, Ted Cruz