Ernst and Young Tax Burden Study

!
@#
Analysis of Milwaukees
relative business
tax burdens

August 2010

i

TABLE OF CONTENTS

TABLE OF CONTENTS................................................................................................i
EXECUTIVE SUMMARY ............................................................................................. ii

Overview.......................................................................................................... 1
I. Comparative Assessment ................................................................................ 3
Composition of Wisconsins State and Local Business Taxes .................................. 3
Inventory of Business Taxes ............................................................................. 5
A. Corporate Income Tax ............................................................................... 5
B. Business Tax Credits ................................................................................. 9
C. Property Tax .......................................................................................... 12
D. Unemployment Insurance Tax .................................................................. 13
E. Sales Tax on Business Input Purchases ...................................................... 14
F. Individual Income Taxes ........................................................................... 15
Who Bears the Burden of Wisconsin Business Tax Increases? .............................. 19
II. Business Tax Competitiveness ....................................................................... 22
Overview ..................................................................................................... 22
Comparison Across Industries ........................................................................ 23
State vs. Local Business Tax Burdens .............................................................. 23
Composition of Business Tax Rates by Type of Tax ............................................. 26
Impact of Statutory Credits on Business Tax Liabilities....................................... 33
III. Combined Business and Household Tax Burdens ............................................. 34

Appendix A ................................................................................................... A-1
Appendix B.................................................................................................... B-1

ii

Analysis of Milwaukees Relative Business Tax Burdens

EXECUTIVE SUMMARY

This report has been prepared by Ernst & Young LLP (EY) for the Metropolitan
Milwaukee Association of Commerce (MMAC). MMAC is interested in knowing how
Milwaukee compares to other selected locations in terms of state and local business
tax competitiveness. To answer this important tax policy question, EY completed the
following: 1) an inventory of the key statutory state and local tax features in selected
locations in fourteen states, 2) estimates of the effective tax rates that businesses
pay on new investments in each location, and 3) estimates of the combined business
taxes and employee individual income and property taxes in each location.

The analysis in this report provides information on state and local business tax
competitiveness in Milwaukee compared to fourteen other locations for four
representative industries: industrial machinery manufacturing, information
technology, financial funds management and management offices. The comparison
locations and industries were selected by MMAC.

Milwaukees business tax competitiveness depends upon the combined impact of the
state and local taxes imposed on business, including corporate income and franchise
taxes, sales taxes on business inputs, and property taxes. The competitiveness
analysis in this study provides a systematic method for determining these overall
business tax burdens for the selected industries, as well as the burdens for selected
taxes.

In addition to state and local taxes imposed on the business expansions, the additional
employees added as a result of the business expansions pay significant state
individual income taxes and local property taxes. The analysis includes estimates of
the relative size of these employee tax burdens across the 15 locations. The
employee tax burdens are combined with the business tax burdens to derive an
overall state and local tax burden comparison.

Key Findings from the State and Local Business Tax Inventory

Businesses operating in Wisconsin paid an estimated $9.7 billion in state and
local taxes in fiscal year 2009. Business taxes equaled 41% of all state and
local taxes ($23.6 billion) collected in Wisconsin in 2009. Milwaukees
business tax competitiveness depends upon this combined state and local
business tax burden.

The property tax is the largest business tax, accounting for 46.5% of total
Wisconsin state and local business taxes. The sales tax on business inputs and

iii

the corporate income tax accounted for 16.2% and 6.7% of the total,
respectively.

The property tax share of state and local business taxes in Wisconsin is 27%
higher than the average share for the 14 states included in this analysis, while
the sales tax share is 25% lower than the average for the comparison states.

Wisconsins statutory corporate income tax rate (7.9%) is 5
th
highest among
the comparison states. The single sales factor apportionment formula reduces
effective corporate income tax rates for multistate firms with substantial sales
outside of Wisconsin.

The Milwaukee location also differs from the comparison locations in the level
of combined state and local statutory sales tax rates. The statutory rate in
Milwaukee (5.5%) is more than 21% below the average for all locations. While
the sales tax paid on business input purchases may be less visible than
property taxes or corporate income taxes, they can have a significant impact
on relative business tax burdens.

Wisconsin is unusual among the comparison states in that residential property
taxes are significantly higher than property taxes on commercial and
industrial property. In addition, residential property taxes are relatively high
compared to property taxes on homes in other states. A recent study
estimates that higher-value homes in Milwaukee have effective property tax
rates that are 6
th
highest among the 50 states. In contrast, Milwaukee ranks
38
th
highest for industrial property and 19
th
highest for commercial property.

Wisconsins relatively high property taxes on residential property, combined
with relatively high effective individual income tax rates on higher-income
taxpayers, suggest that Milwaukee business employers may have to pay
employees higher wages to offset these higher personal tax burdens.

Relative to all 50 states, Wisconsin is ranked 12
th
highest in terms of the
percentage of a business tax increase that is expected to be borne by state
residents through lower spendable income through either higher prices for
consumer purchases or lower wages and salaries. The Wisconsin percentage is
80%. For the comparison locations used in this study, Wisconsins percentage
is tied with Florida for second highest.

This tax incidence measure indicates that, in the long run, Wisconsin
business tax increases fall primarily on state residents through a combination
of higher prices of consumer purchases and lower incomes. Only 20% of a
business tax increase is shifted to non-resident investors and consumers. It

iv

also means that a reduction in business taxes would primarily benefit
Wisconsin residents.

Wisconsin imposes a relatively low sales tax burden on business input
purchases due to a low combined state and local sales tax rate of 5.5%. The
combined rate is 22% below the average for the 15 locations.

Key Findings from the Competitiveness Analysis

The competitiveness analysis compares business tax burdens in Milwaukee
and 14 other locations using effective tax rates (ETRs). The ETRs measure the
percentage reduction in before-tax income due to the payment of state and
local business taxes.

The overall state and local business tax ETR in Milwaukee for industrial
manufacturing is 15.6% below the average for all 15 locations. The relatively
low overall ETR reflects property tax exemptions for tangible property used in
manufacturing, a relatively low property tax rate, significant sales tax
exemptions on machinery and equipment purchases, and the favorable impact
of single sales factor apportionment for the corporate income tax.

For the industrial machinery manufacturing example, Milwaukee is ranked
13
th
. However, Milwaukees overall ETR is closer to competitor states than
suggested by the rankings. Milwaukees overall industrial machinery
manufacturing ETR (5.4%) is very close to the average rate (5.5%) for the nine
lowest ranked locations. This group is significantly below the ETRs for the
group of six states that have significantly higher effective tax rates (average
of 7.8%).

Milwaukee is ranked 14
th
in overall ETR for information technology, almost
20% below the 15-location average. Milwaukees ETRs for financial funds
management and management offices are also below average. The
management offices example is 15.6% below the average for the comparison
states, while the financial funds management example is 14.2% below the
average.

The ETR rankings for the other three industries also show that Milwaukees
ETRs are similar to the tax rates in the six to eight states in the second tier of
states with below-average ETRs. In other words, the average ETR in each
industry are being pulled up by significantly higher tax rates in four or five
states included in the analysis. While lower than the top tier states,
Milwaukees ETRs are in line with the ETRs for the second tier of locations.

Milwaukees ranking for local taxes tends to be lower than state tax ranking
because of relatively low property taxes on industrial and commercial

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property. The relatively low ETR estimate for property taxes is consistent with
other interstate business tax study results.

In terms of ETRs for state and local corporate income taxes, the Milwaukee
location ranks 7
th
highest for management offices, 8
th
highest for information
and financial funds management and 9
th
highest for industrial machinery
manufacturing.

Because of single sales factor apportionment, corporate income tax ETRs are
sensitive to the assumed share of in-state sales applied to the expansion. For
companies making a large percentage of their sales to out-of-state customers,
the single sales factor formula provides substantial reductions in effective
corporate tax rates.

For manufacturing, statutory credits tend to provided a greater reduction in
ETRs for the states with the highest before-credit ETRs (Charlotte, Detroit,
Baltimore and Pittsburgh). Statutory credits provide relatively less tax relief
for the other three industries. Milwaukees statutory credits are close to the
industry averages in the analysis.

Key Findings from the Combined Business and Employee Tax Burden Analysis

Milwaukee imposes relatively high individual income and residential property
taxes compared to the other locations. In combination with relatively high
industry wages, the new employees added in the business expansions pay
relatively high income and property taxes in Milwaukee.

Combining the business and employee tax burdens, Milwaukee emerges as one
of the least competitive locations for the machinery manufacturing and
information technology industries.

Milwaukee ranks 3
rd
highest for machinery manufacturing, just behind Buffalo
and Detroit, compared to 13
th
highest for business taxes. For the information
technology expansion, Milwaukee is tied with Baltimore as the highest taxed
location, compared to 14
th
highest for business taxes on this industry.

Milwaukee ranks 7
th
highest for combined business and employee taxes for the
financial funds management expansion, compared to 11
th
for business taxes
only. For the management offices expansion, Milwaukees rank remains 9
th

highest. The difference in rankings between business taxes and combined
business and employee taxes is less for these industries because the
expansions add fewer employees with lower wages.

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Policy Implications

It is important to determine which states Wisconsin is competing with for new
jobs and capital investments. As noted, Wisconsins ETRs are much closer to
those in the second tier (ranked by ETRs) of competitor states included in this
study. The figures show that the average ETRs for all 15 locations are being
pulled up by four high-tax locations (Charlotte, Nashville, Detroit and
Baltimore). For the other locations, Milwaukee does not have a significant
advantage in terms of state and local business tax burdens. To be more
competitive with the second tier states, Wisconsin would have to reduce overall
business tax burdens.

Wisconsin is most competitive in terms of state and local business tax burdens
on industrial machinery manufacturing. Corporate income taxes account for a
much larger share of business taxes for financial funds management and
management offices. However, for information technology, sales taxes on
business inputs accounts for the largest share of the business tax burden. For
industrial machinery manufacturing, unemployment taxes account for the
largest percentage of business taxes. Because different tax types account for
different shares of the combined state and local tax burdens for the selected
industries, business tax reform in Wisconsin will likely involve a package of
changes affecting multiple business taxes.

Wisconsins tax competitiveness is determined by more than just state and local
business taxes paid directly by businesses operating in the state. Residential
property taxes and individual income taxes also affect tax competitiveness
indirectly. This occurs if business has to pay relatively higher wages to
employees to offset Wisconsins relatively high property taxes on homes and
income taxes on earnings. Any discussion of improving Wisconsins tax
competitiveness needs to address simultaneously business taxes, property
taxes on residential property and Wisconsins individual income tax.

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Analysis of Milwaukees Relative Business Tax Burdens

Overview

This report has been prepared by Ernst & Young LLP (EY) for the Metropolitan
Milwaukee Association of Commerce (MMAC). MMAC is interested in knowing how
Milwaukee compares to other selected locations in terms of state and local business
tax competitiveness. To answer this important tax policy question, EY completed the
following: 1) an inventory of the key statutory state and local tax features in selected
locations in fourteen states, 2) estimates of the effective tax rates that businesses
pay on new investments in each location, and 3) estimates of the combined business
taxes and employee individual income and property taxes in each location.

The analysis in this report provides information on state and local business tax
competitiveness in Milwaukee compared to fourteen other locations for four
representative industries: industrial machinery manufacturing, information
technology, financial funds management and management offices. The comparison
locations and industries were selected by MMAC.

The first study component, an inventory of tax features, compares the key statutory
tax and credit features that are expected to have an impact on Wisconsins business
tax competitiveness. However, comparisons of the statutory tax features are only the
starting point for a more in-depth analysis of tax competitiveness, primarily because
this comparison does not provide information on the contribution that the key
features make to tax liabilities or the relative size of each state and local tax in
determining overall business tax burdens.

The second component of the study, estimates of effective business tax rates, uses
the statutory information from the first component to estimate the dollar amounts of
taxes paid by each industry in the selected locations. The tax estimates are derived
from EYs business tax competitiveness model (BTCM) that calculates state and local
business tax burdens imposed on new capital investments at each location. The
analysis looks at the burden of major state and local business taxes over the life span
of an investment. The same model can also be used to estimate the effect of tax
policy changes on Milwaukees business tax competitiveness, which may contribute to
higher long-run state economic growth.

In addition to the business taxes on the expansions, employees added in the
expansions pay significant state individual income taxes and local property taxes. The
last component of the study reports estimates of the relative size of these employee
tax burdens across the 15 locations. The employee tax burdens are combined with the
business tax burdens to derive an overall state and local tax burden comparison.

Section I presents the results of the comparative analysis of the statutory tax features

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in each location. Section II summarizes the results of the business tax competitiveness
analysis. The results are presented as effective tax rates for combined state and local
taxes and for each major state and local tax. Section III reports the results of the
combined business and employee tax burden comparisons.

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I. Comparative Assessment

The comparative analysis provides an overview and inventory of significant state and
local business tax features in Milwaukee and the fourteen following locations:

Baltimore, MD Kansas City, MO
Buffalo, NY Minneapolis, MN
Charlotte, NC Nashville, TN
Chicago, IL Orlando, FL
Cleveland, OH Pittsburgh, PA
Detroit, MI St. Louis, MO
Indianapolis, IN Dallas, TX

The first section of the comparative assessment looks at the size and composition of
Wisconsin state and local taxes on business and compares Wisconsins composition
with that in the comparison states. The second section provides the inventory of
business tax and personal income tax features for each location. Details are provided
for corporate income taxes, business tax credits, property taxes, unemployment
insurance taxes, sales taxes and individual income taxes. The final section examines
the expected impact of business tax increases on Wisconsin households in the form of
higher prices for goods and services and lower wages paid employees. In other words,
it discusses who is expected to bear the burden of an increase in business taxes in
Wisconsin.

Composition of Wisconsins State and Local Business Taxes

Wisconsins business tax competitiveness depends upon the combined impact of all
state and local business taxes imposed in Wisconsin and the comparison locations.
Table 1 shows the estimated level and distribution of Wisconsin state and local
business taxes by tax type for fiscal year 2009. As shown in Table 1, Wisconsin
businesses paid over $9.7 billion in total state and local taxes in FY 2009.

The single largest business tax is the property tax, a tax on highly mobile capital
investment.
1
As shown in the table, the property tax accounts for 46.5% of combined

1
The business property tax estimate in the 50-state study begins with an estimate of owner-occupied housing
property taxes reported as itemized deductions on federal individual income tax returns filed by Wisconsin taxpayers
in 2007. The reported property tax deduction amount was $4.0 billion. Assuming that 8% of filers do not itemize,
this amount was increased to $4.3 billion to estimate total property taxes on owner-occupied housing. Compared to
$8.4 billion of total Wisconsin property tax collections reported by the U.S. Census Bureau, Wisconsin households
paid 50.8% of total property taxes. The business property tax share was estimated to be the remaining 49.2% of total
property taxes. This share was used to compute the FY2009 business property tax amount based on FY2009
property tax collections reported by the Census Bureau. It should be noted that this estimating methodology
classifies all property taxes paid on residential rental property as business property taxes.

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state and local business taxes in Wisconsin, followed by sales taxes imposed on
business inputs at 16.2% of the total. The corporate income tax accounts for 6.7%.
General sales and use taxes, generated by business purchases of taxable goods and
services, include intermediate inputs and capital expenditures but exclude any sales
and use taxes that business collects from final consumers.

The corporate income tax amount in Table 1 includes the franchise tax plus the
corporate income tax imposed on taxable net income. The individual income taxes are
the income taxes paid by individuals on business income from partnerships, LLCs, and
sole-proprietorships. While these forms of business do not pay tax at the entity level,
their owners and investors pay significant individual income taxes equivalent to 5.6%
of total Wisconsin state and local business taxes.

Table 1
FY 2009 Wisconsin
State and Local Business Taxes

Business Tax
FY 2009
(billions)
% Total
Taxes
Property taxes on business property $4.5 46.5%
General sales taxes on business
inputs 1.6 16.2
Excise and gross receipts taxes 0.7 8.1
Corporate income tax 0.7 6.7
Unemployment insurance tax 0.7 6.7
Individual income tax on business
income 0.5 5.6
License and other business taxes 1.0 10.2
Total Business Taxes $9.7 100.0%

Source: Ernst &Young, FY2009 50-State Business Tax Study, March 2010.

Table 2 compares the distribution of business taxes for Wisconsin and the 13 other
states included in the analysis. The most important difference shown in the table is
Wisconsins relatively heavy reliance on the property tax. Wisconsin is 3rd highest in
the share of property tax in total state and local business taxes; Wisconsins share
exceeds the national average by 10%. Reducing business property taxes was a key
component of the recent tax reform packages in Michigan, Texas, and Ohio.

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Table 2
Composition of State and Local Business Taxes, by Type, FY2009

State
Property
Tax Sales Tax
Excise
and Gross
Receipts
Corporate
Income
Unemploy-
ment
Insurance
Tax
Individual
Income
Tax
License
and Other
Total
Business
Taxes
Florida 41.9% 19.1% 24.4% 5.3% 2.5% 0.0% 6.8% 100.0%
Illinois 40.5 14.0 16.6 10.4 6.3 4.1 8.0 100.0
Indiana 47.6 21.4 5.9 9.0 5.4 6.0 4.6 100.0
Maryland 26.1 16.7 18.2 8.7 4.4 9.9 16.0 100.0
Michigan 52.0 18.7 7.1 4.2 8.6 4.4 5.0 100.0
Minnesota 36.2 19.2 13.9 7.8 7.9 7.9 7.1 100.0
Missouri 33.2 25.4 13.9 3.3 6.9 7.6 9.7 100.0
New York 38.5 20.4 7.3 18.4 4.2 8.4 2.8 100.0
North Carolina 30.9 21.9 15.3 7.5 7.1 8.0 9.4 100.0
Ohio 39.9 18.0 12.8 5.6 5.1 6.6 12.0 100.0
Pennsylvania 34.8 14.9 13.1 7.6 9.1 6.7 13.7 100.0
Tennessee 32.8 29.6 11.2 8.6 4.7 0.4 12.6 100.0
Texas 42.9 26.0 11.9 0.0 2.0 0.0 17.1 100.0
Wisconsin 46.5 16.2 8.1 6.7 6.7 5.6 10.2 100.0
U.S. Average 36.5 21.5 12.0 8.6 5.2 5.5 10.8 100.0

Source: Ernst &Young, FY2009 50-State Business Tax Study, March 2010.

Inventory of Business Taxes

The tax parameters presented in the following sections provide a summary of the
significant features of state and local business (and individual income) tax systems in
Milwaukee, Wisconsin and 14 comparison locations selected by MMAC. Differences in
the statutory provisions of the state and local taxes in each location determine a
locations business tax competitiveness.

A. Corporate Income Tax

Table 3 summarizes key statutory state and local corporate income tax rates for the
15 locations compared in this report. It also includes information on filing status,
apportionment factors, the sourcing of sales, and the extent to which states conform
to the federal corporate income tax base.

Wisconsins top marginal corporate tax rate is 7.9%, the 5
th
highest state tax rate of
the states in comparison. Three municipalities impose an additional local corporate
income tax: Kansas City, St. Louis and Cleveland. Five of the 14 states, including
Wisconsin, require combined reporting. Seven of the 14 states apportion corporate

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income using a single sales factor (SSF) formula, and Indiana and Minnesota are
currently phasing in SSF.
2

The next set of columns identifies the sourcing rules for service sales, including cost
of performance (CoP) and market based sourcing (MBS). Five of the states, Florida,
Indiana, Missouri, North Carolina, Pennsylvania, and Tennessee, source service
income to the state where the greater proportion of income production occurs. The
remaining states use market-based sales sourcing rules.

The federal tax base conformity information in Table 3 shows the extent to which
states are decoupling from the federal base. State decoupling from Sec. 179 has
occurred in Wisconsin, Florida, Indiana, Maryland, and Minnesota. In Minnesota,
taxpayers must add back to federal taxable income, 80% of the amount by which the
deduction allowed by current Sec. 179 exceeds the deduction allowable under Sec.
179 as amended through 12/31/2003. Four of the comparison states (Florida,
Illinois, Missouri, and Pennsylvania) allow the Sec. 199 deduction.

Michigan, Ohio, and Texas follow different methods of corporate taxation:

Michigan: Michigans business tax (MBT) consists of two parts: the net income
tax (4.95%) and the modified gross receipts tax (0.80%). A 21.99% surcharge is
applied to the apportioned business income tax and gross receipts tax before
credits, and is reflected in the effective tax rate of 6.04% listed in Table 3. The
starting point for the business income tax base is federal taxable income from
business activity. For the gross receipts tax, the tax base is the businesss gross
receipts less purchases from other firms before apportionment.

Ohio: The base for Ohios commercial activity tax (CAT) is gross receipts from
business activities in Ohio. Only Washington State has a similar gross receipts
tax as its general, business-entity tax.

Texas: Texas imposes a margin tax of 1% to a taxable entitys total revenue less
the greater of (1) compensation, (2) cost of goods sold, or (3) 30% of total
revenue. The 1% rate is reduced to 0.5% for retailers and wholesalers.

Ohio and Texas adopted the new business tax bases as replacements for existing
corporate income taxes; Michigans new system replaced the single business tax, a
modified value added tax. All three states apply the new taxes to almost all forms of
doing business.

2
Some of these locations have special apportionment rules that apply to the selected industries. These differences
are included in the calculation of effective tax rates in the competitiveness analysis discussed in the next section.

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Table 3
Corporate Income Tax Parameters

Location
Filing
Status

Apportionment Conformity with the Federal Base
8

Tax Rates

Formula Weights Sourcing
State City
Combined
or Separate
Filing
State
Statutory
Tax Rate
Local
Rate
Net
Worth
Tax
Property
factor
Payroll
factor
Sales
factor
6

Throw-
back
Rule
Sourcing
of
Services
7

Section
199
Section
179
9

NOL
Carry-
backs
10

Bonus
Depre-
ciation
11

Florida Orlando Separate 5.5% - - 25.0% 25.0% 50.0% No CoP Yes No No No
Illinois
1
Chicago Combined 7.3% - 0.10% 0.0% 0.0% 100.0% Yes MBS Yes Yes No No
Indiana Indianapolis Separate 8.5% - - 10.0% 10.0% 80.0*_ Yes CoP No No Yes No
Maryland Baltimore Separate 8.3% - - 25.0% 25.0% 50.0% No MBS No No Yes No
Michigan
2
Detroit Separate 6.0% - - 0.0% 0.0% 100.0% No MBS No Yes No No
Minnesota Minneapolis Combined 9.8% - - 6.5% 6.5% 87.0*_ No MBS No No No No
Missouri Kansas City Separate 6.3% 1.0% 0.03% 0.0% 0.0% 100.0% Yes CoP Yes Yes Yes Yes
Missouri St. Louis Separate 6.3% 1.0 0.03% 0.0% 0.0% 100.0% Yes CoP Yes Yes Yes Yes
New York Buffalo Combined 7.1% 0.0 0.15% 0.0% 0.0% 100.0% No MBS No Yes Yes No
N. Carolina
3
Charlotte Separate 7.1% 0.0 0.15% 25.0% 25.0% 50.0% No CoP No Yes No No
Ohio
4
Cleveland Combined 0.3% 2.0 - 20.0% 20.0% 60.0% No MBS n.a. n.a. n.a. n.a.
Pennsylvania Pittsburgh
Separate
10.0% - 0.29% 5.0% 5.0% 90.0% No CoP Yes Yes No No
Tennessee Nashville
Separate
6.5% - 0.25% 25.0% 25.0% 50.0% No CoP No Yes No No
Texas
5
Dallas
Separate
1.0% - - 0.0% 0.0% 100.0% No MBS n.a. n.a. n.a. n.a.
Wisconsin Milwaukee Combined 7.9% - - 0.0% 0.0% 100.0% Yes MBS No No No No

Sources: CCH, RIA Checkpoint, state tax agencies
Notes:
1
Illinois' 7.3% income tax includes the personal property replacement tax.
2
The Michigan Business Tax (MBT) consists of two parts: 1) Net income tax and 2) Modified gross receipts tax. The net income tax rate is 4.95%, while the gross
receipts tax is 0.80%. A 21.99% surcharge is applied to the apportioned business income tax and gross receipts tax before credits, and is reflected in the effective tax
rate of 6.04%.
3
The statutory tax rate for North Carolina includes a 3% surcharge for years 2009 and 2010. Taxpayers must add back 85% of the amount allowed as a special
accelerated depreciation deduction under Internal for property placed in service after December 31, 2007, but before January 1, 2010 but can later deduct the

8

amount added back over a 5year period.
4
The statutory tax rate is Ohio's commercial activities tax (CAT), which is a tax on gross receipts.
5
In lieu of a corporate income tax, Texas imposes a 1% gross margins tax on businesses. This rate is 0.5% for a taxable entity defined as a retailer or wholesaler.
6
Figures with an asterisk (*) indicate that the state is phasing in a single sales factor.
7
CoP stands for "cost of performance"; MBS is "market-based sales."
8
Ohio and Texas do not have traditional corporate income taxes; they imposed modified gross receipts taxes.
9
The following states have special rules related to Section 179: Minnesota and New York.
10
The following states allow net operating loss (NOL) carrybacks for two years, rather than five years: Indiana, Maryland, Missouri, and New York. However, in New
York eligible small businesses may temporarily elect an extended carryback period of up to five years for 2008 and 2009 NOLs, but all carrybacks are subject to a
$10,000 limit.
11
The following states have special rules related to bonus depreciation: Florida, Michigan, Minnesota, Missouri, New York, and North Carolina.

9

B. Business Tax Credits

Table 4 provides a summary of the major business tax credits available in the 15
locations. These are tax credits that are considered potentially important in affecting
business expansion and new investment decisions. The credits are statutory credits
available to any company meeting the credit requirements. The table does not include
the potentially large, discretionary credits, such as Michigans MEGA credits, that are
awarded on a case-by-case basis by economic development or other state agencies.
Table 4A shows the credits available to all businesses, while Table 4B shows credits
that are industry-specific. Research and development credits are available in most of
the states, while capital investment and job creation credits are more limited,
particularly for specific industries.

Texas margin tax system provides job creation and capital investment credits to
business through the Texas Enterprise Fund. The Texas credits are treated as
statutory credits in this analysis.
Table 4A
Statutory Business Tax Credits

State
Capital
Investment Job Creation R&D Other
Florida x x x x
Illinois x x x x
Indiana x x
10% of excess R&D
expenses
x
Maryland x x
3% of the R&D
expenses that do not
exceed the state
base amount and
10% excess
expenses.
x
Michigan MEGA only x
1.90% of the R&D
expenses.
Personal Property:
35% of property
taxes
Minnesota x x
10% of the first
$250,000 in
increased costs; 5%
of any additional
increased costs.
x
Missouri
Only for companies in
development by the
end of 2004.
Expanding businesses:
retain 100% of the
withholding tax of the
new jobs. Length of
credit depends on
wage levels.
x
High Impact
businesses: 3% of
the payroll of the
new jobs each year
for five years; plus
Average Wage
Bonus and Local
New York x x x x

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Table 4A (contd)
Statutory Business Tax Credits

State
Capital
North Carolina
Business Property: 7%
to 3.5%, depending
location; over four
years. Real Property:
30% of qualifying real
property costs if
located in Tier 1; over
7 years.
$12,500 to $750,
depending on location.
1.25% to 3.25%,
depending on
amount of R&D
expenses
x
Ohio x x
7% of the excess
qualified research
expenses over the
past 3 year avg.

Pennsylvania x
Negotiable credit of up
to $1,000 per job.
10% of the excess of
expenditures.
x
Tennessee x
$4,500 to $5,000 per
job. No carryforward;
3-20 years.
x x
Texas
Texas Enterprise
Fund
Texas Enterprise Fund x
Designated projects
are eligible to apply
for state sales and
use tax refunds on
qualified
expenditures. Level
and amount is
related to the
capital investment
and jobs created at
Wisconsin
Max 3% of eligible
equipment and 5% of
eligible real property.
$3,000 to $7,000,
depending on wage
levels.
5% of inc. R&D
expenses; 5% of
qualifying
expenditures on
tangible depreciable
research facility
property.
Supercredit if
qualified expenses
exceed 125% of
Employee Training:
max 50% of eligible
training costs.

11

Table 4B
Industry-Specific Business Tax Credits

State
Capital
Florida
Information, HQ: 5%
of qualifying
investment; 20 years.
Manuf: $3,000-$5000
per new job, rewarded
as a tax refund.
x x
Indiana
Manuf: up to 10%,
limited to increase in
tax over base year or
last year credit is
claimed
x x
HQ relocation: 50%
of relocation costs;
Michigan
Manuf., R&D (MEGA): Up to the tax rate times
the new payroll related to the expansion, plus
the taxpayers liability related to the
expansion site; up to 20 years.
x x
Missouri
x
Technology: 5% of
payroll of new jobs for
five years, plus avg.
wage bonus
x x
New York
Manuf. and HQ: 5% of
the first
$350,000,000 in
qualifying
expenditures; 4% of
any other.
Manuf. and HQ:1.5 to
2.5% of expenditures
x x
Ohio

Manuf. and HQ: % of
the IIT withholdings of
the employees, not to
exceed 75% for up to
15 years.
x x
Tennessee
Industrial Machinery
Tax Credit: from 1% to
10% of qualifying
investments,
depending on
investment amounts
x x
HQ: relocation
expenses, capped
between $10,000
to $50,000 per job
depending on the
number of jobs
created. Also a sales
tax credit, for
certain projects.
Wisconsin

x x
Corporate HQ:
$4,000 to $10,000,
depending on wage
levels.

12

C. Property Tax

The property tax accounted for over 46% of combined state and local business taxes
in Wisconsin (vs. 36% on average in the U.S.) in FY2009. In estimating the property
taxes on new investments in the business competitiveness analysis, EY uses effective
tax rates. The effective property tax rates equal the statutory tax rates multiplied by
the assessment ratio and the sales ratio, if available for a state. These adjustments to
statutory tax rates provide a more accurate estimate of the effective tax rates
(property taxes divided by market value of property) in each location.

Table 5 presents the effective tax rates by type of property for both commercial and
industrial property. The features are presented for both commercial and industrial
property. The table also indicates where categories of property are exempt from tax.
Milwaukee joins six other states in exempting industrial machinery and equipment
from the property tax.

Table 5
Effective Property Tax Rates, Taxable Year 2008

Commercial Industrial
State City
Real
Property
Machinery
& Equip.
Other
TPP
Motor
Vehicles
Real
Property
Machinery
& Equip.
Other
TPP
Motor
Vehicles
FL Orlando 1.7% 1.9% 1.9% exempt 1.7% 1.9% 1.9% exempt
IL Chicago 2.4 exempt exempt exempt 2.8 exempt exempt exempt
IN Indianapolis 2.6 2.8 2.8 exempt 2.7 2.8 2.8 exempt
MD Baltimore 2.0 5.7 5.7 exempt 2.0 exempt 5.7 exempt
MI Detroit 4.1 3.5 3.5 exempt 4.1 1.9 3.0 exempt
MN Minneapolis 3.3 exempt exempt exempt 3.3 exempt exempt exempt
MO Kansas City 3.0 2.6 2.6 2.6 3.0 2.6 2.6 2.6
MO St. Louis 2.7 2.3 2.3 2.2 2.7 2.3 2.3 2.2
NY Buffalo 3.9 exempt exempt exempt 3.9 exempt exempt exempt
NC Charlotte 1.1 1.3 1.3 1.3 1.1 1.3 1.3 1.3
OH Cleveland 2.5 exempt exempt exempt 2.7 exempt exempt exempt
PA Pittsburgh 2.6 exempt exempt exempt 2.6 exempt exempt exempt
TN Nashville 1.7 1.2 1.2 4.1 1.7 1.2 1.2 4.1
TX Dallas 2.3 2.6 2.6 exempt 2.6 2.6 2.6 exempt
WI Milwaukee 2.3 2.3 2.3 exempt 2.3 exempt 2.3 exempt

Source: Minnesota Taxpayer Association, 50-State Property Tax Comparison Study, June 2009.

An additional feature of Milwaukees property tax system should be noted: residential
property faces significantly higher property taxes than commercial or industrial
property. According to the most recent 50-state property tax report prepared by the
Minnesota Taxpayers Association, the effective tax rate on residential property was
6
th
highest for the largest city in each state. In contrast, the commercial tax rate was

13

19
th
highest and the industrial rate was 38
th
highest.
3
One implication of the relatively
higher property taxes on residential property is that employees of Milwaukee
companies may view Milwaukee as a relatively high-tax location, even if business
property taxes are more competitive.

D. Unemployment Insurance Tax

Unemployment tax collections depend upon the taxable wage base and the tax rate
schedule that applies to a specific employer. Table 6 describes the tax rates and tax
bases that apply in each location. The tax rates are the average state rates that
applied in 2006 and 2009. The 2006 rates may be viewed as the rates applicable
during an economic expansion; the 2009 rates were beginning to be affected by the
recession that began in December 2007. Compared to the 14 locations, Wisconsins
unemployment tax effective tax rate was close to average.

Table 6
Unemployment Insurance Tax Parameters

State
2010 Taxable
Wage Base
Rates
Indexed
Average State Rates
2006 2009
Florida $7,000 No 2.00% 1.51%
Illinois 12,520 No 4.60 2.54
Indiana 7,000 No 3.00 2.62
Maryland 8,500 No 2.30 1.97
Michigan 9,000 No 4.60 4.57
Minnesota 27,000 Yes 1.80 1.50
Missouri 13,000 No 2.20 2.05
New York 8,500 No 4.00 3.68
North Carolina 19,700 Yes 2.00 1.71
Ohio 9,000 No 2.60 2.69
Pennsylvania 8,000 No 5.40 4.63
Tennessee 9,000 No 1.90 2.90
Texas 9,000 No 2.30 1.26
Wisconsin $12,000 No 2.90% 2.59%

Source: U.S. Department of Labor
Note: Tax rates are annualized 2006:Q4 and 2009: Q4 data

3
Minnesota Taxpayer Association, 50-State Property Tax Comparison Study: Payable Year 2008, June 2009. The
effective property tax rates are those reported for the highest value residential, commercial or industrial property
examples presented in the study.

14

E. Sales Tax on Business Input Purchases

Table 7 provides summary measures of the taxability of business inputs under the
sales tax, for the four industries that will be analyzed in more detail in this study: 1)
management of companies; 2) securities, commodities, contracts and investments; 3)
data processing services; and 4) industrial machinery. The percentages in the table
were estimated from EYs 50-state sales tax model.

The figures in the table show what percentage of the estimated total input purchases
(both capital and operating purchases) in each state are subject to the sales and use
tax. The estimates suggest that Wisconsin applies the business sales tax to a smaller
portion of total purchases than in the comparison states. However, the estimates also
show that the sales tax, which in theory should only apply to final sales to households,
applies to a large portion of business input purchases.

The Milwaukee location differs from the comparison locations in the level of combined
state and local statutory sales tax rates. The statutory rate in Milwaukee (5.5%) is
more than 21% below the average for all locations. While the sales tax paid on
business input purchases may be less visible than property taxes or corporate income
taxes, they can have a significant impact on relative business tax burdens.

Table 7
Taxability of Business Purchases Subject to Sales Tax

Operating inputs Capital investments
State
Mgmt of
Companies
Securities,
commodity
contracts,
investments
Data
processing
services
Industrial
machinery
Mgmt of
Companies
Securities,
commodity
contracts,
investments
Data
processing
services
Industrial
machinery
FL 16% 1% 37% 4% 61% 59% 50% 15%
IL 12 1 31 2 67 61 67 19
IN 13 2 38 2 57 59 33 15
MD 17 3 43 4 78 74 75 28
MI 15 1 36 2 74 74 58 23
MN 17 2 38 2 74 74 58 23
MO 18 3 42 4 78 74 75 23
NY 18 3 42 4 74 74 58 23
NC 17 2 40 4 66 65 54 26
OH 15 2 40 5 48 43 13 20
PA 24 3 46 4 57 59 33 20
TN 13 1 35 2 69 65 71 24
TX 13 1 34 2 66 65 54 24
WI 17% 1% 36% 7% 61% 59% 50% 21%
Source: Commerce Clearing House; EY calculations.

15

F. Individual Income Taxes

Table 8 compares the individual income tax parameters in the 15 cities selected for
this study. Wisconsins individual income tax rate range is in line with the range in
states presented in the table. New York, Minnesota and the cities of Baltimore and
Cleveland have higher maximum tax rates than Wisconsin; Missouri and North
Carolina have similar ranges. Florida and Texas do not have an individual income tax.

Table 8
Individual Income Tax Parameters

State City
Range of Tax
Rates
Personal Exemptions
Standard
Deduction
Federal
Income
Tax
Deductible
Taxable
Starting
Point
Earned
Income
Credit State City Single Married
Dependen
t
FL Orlando n.a.% n.a. n.a. n.a. n.a. n.a. n.a. n.a. %
IL Chicago 3.00% $2,000 $4,000 $2,000 0 No Fed AGI 5%
5

IN Indianapolis 3.00% 1,000 2,000 1,000 0 No Fed AGI 0%
5

MD Baltimore 2-6.25% 3.05% 2,400 4,800 2,400 1,500-4,000 No Fed AGI 25%
5

MI Detroit 4.00% 2.50% 3,300 6,600 3,300 0 No Fed AGI 20%
5

MN Minneapolis
5.35-
7.85%
3,650 7,300 3,650
5,700-
11,400
2

No Fed tax.inc. 22-46%
5

MO Kansas City 1.5-6.00% 1.00% 2,100 4,200 1,200 5,700-11,400 Yes
3
Fed AGI 0%
5

MO St. Louis 1.5-6.00% 1.00% 2,100 4,200 1,200 5,700-11,400 Yes
3
Fed AGI 0%
5

NY Buffalo 4.5-8.97% 0 0 1,000 7,500-15,000 No Fed AGI 30%
5

NC Charlotte 6-7.75% 3,650 7,300 3,650 3,000-6,000
2
No
Fed tax.
inc.
5%
5

OH Cleveland .62-6.24% 2.00% 1,550 3,100 1,550 0 No Fed AGI 0%
5

PA Pittsburgh 3.00 % 3.00% - - - 0 No
State tax.
inc.
0%
5

TN Nashville 6.00
1
% n.a. n.a. n.a. 0 No n.a. 0%
5

TX Dallas n.a.% n.a. n.a. n.a. n.a. n.a. n.a. n.a. %
WI Milwaukee 4.6-7.75% 700 1,400 700 7,520-15,830 No Fed AGI 4-43
6
%

Sources: Federal Tax Administrators (FTA); Checkpoint for Detroit, Kansas City Revenue Dept., St. Louis Revenue
Dept., Cleveland Central Collection Agency, and Pittsburgh Dept. of Finance

Notes: 2010 Rates. See appendix for tax rate schedule details by state
1
State income tax is limited to dividends and interest income only
2
These states allow personal exemption or standard deductions as provided in the IRC.
3
Deduction is limited to $10,000 for joint returns and $5,000 for individuals
4
See Minnesota Working Family Credit (WFC) Table (Schedule M1WFC)
5
4% for 1 child; 14% for 2; 43% for 3+ children

16

Wisconsins standard deduction is higher than every location except for New York.
This provides relatively lower effective tax rates for lower-income individuals.
Missouri is the only state that allows deductions for federal income taxes paid, and
allows up to $10,000 for joint returns and $5,000 for individuals. The taxable income
starting point, federal adjusted gross income, is standard across most states.

The last column in Table 8 shows whether a state offers a refundable earned income
credit. Wisconsins earned income tax credit ranges from 4% of the federal EIC for
taxpayers with one qualifying child up to 43% of the federal EIC for taxpayers with
three qualifying children. For taxpayers with one qualifying child, Wisconsins rate is
lower than any other state that offers the credit. Conversely, with three qualifying
children Wisconsins rate is higher than any other state except for Minnesota, who
offers a slightly higher credit for those which qualify for their highest EIC rate of 46%.

The combined impact of the tax rate, tax base and credit provisions on effective tax
rates (actual taxes divided by gross income) is not evident from looking at the
statutory tax features in each location. The following two tables provide estimates of
these effective tax rates from two different studies.

Table 9 presents the results of the Government of the District of Columbias latest
(September 2009) state-by-state comparison of state and local tax rates and tax
burdens for the 2008 tax year.
4
The D.C. study calculates the tax burdens and
effective tax rates in the largest city in each state.
5
The tax burden is stated as an
effective tax rate, the percentage of total income that must be paid in individual
income taxes. Tax burdens and effective tax rates are estimated for a hypothetical
family of three at three different annual income levels: $25,000, $75,000, and
$150,000.

The family with an annual income of $25,000 has no tax liability in Wisconsin.
Wisconsin has a relatively average income tax burden for the families in the $75,000
and $150,000 income ranges. However, the income range used in the D.C. study does
not provide information on the distributional impact of individual income taxes for
higher-income taxpayers.

4
Tax Rates and Tax Burdens in the District of Columbia: A Nationwide Comparison September 2009.
5
The largest cities included in the D.C. study coincide with the cities selected by MMAC, except for Orlando
(Jacksonville is the largest city), St. Louis (Kansas City), Buffalo (New York City), Cleveland (Columbus),
Pittsburgh (Philadelphia), Nashville (Memphis), and Dallas (Houston).

17

Table 9
Personal Income Tax Burdens for the Largest City in Each State,
for Family of 3 at Different Household Income Levels
6

$25,000 $75,000 $150,000
State
Income
Tax
% Burden
State
Income
Tax
% Burden
State
Income
Tax
% Burden
Pennsylvania 1,769 7.1% Pennsylvania 5,286 7.0% New York 11,604 7.7%
Indiana 787 3.1% Michigan 4,610 6.1% Pennsylvania 10,501 7.0%
Ohio 751 3.0% Maryland 3,627 4.8% Michigan 9,747 6.5%
Michigan 582 2.3% Ohio 3,492 4.7% Maryland 9,405 6.3%
North Carolina 518 2.1% Indiana 2,992 4.0% Ohio 8,898 5.9%
Illinois 474 1.9% North Carolina 2,958 3.9% North Carolina 8,385 5.6%
Missouri 465 1.9% Wisconsin 2,866 3.8% Wisconsin 7,748 5.2%
Maryland 0 0% New York 2,685 3.6% Minnesota 7,346 4.9%
Minnesota 0 0% Missouri 2,670 3.6% Missouri 7,070 4.7%
New York 0 0% Minnesota 2,248 3.0% Indiana 6,292 4.2%
Tennessee 0 0% Illinois 1,870 2.5% Illinois 4,046 2.7%
Wisconsin 0 0% Tennessee 0 0% Tennessee 221 .1%
Florida n.a. n.a. ) Florida n.a. n.a.) Florida n.a. n.a.)
Texas n.a. n.a. ) Texas n.a. n.a.) Texas n.a. n.a.)
Simple average 764 1.8% Simple average 3,209 3.9% Simple average 7,605 5.1%

Source: Government of the District of Columbia, Tax Rate and Tax Burdens 2008, September 2009.

Table 10 presents estimates of effective individual income tax rates by state for a
broader range of incomes. The estimates are from a recent study (November 2009)
by the Institute on Taxation & Economic Policy. The table shows estimated individual
income tax burdens (in terms of total aggregate tax amounts) by household income
percentiles.
7
It shows that Wisconsins effective individual income tax rates exceed
the simple average in each group for the comparison states.

Wisconsin also has a relatively large difference between the effective tax rates in
higher percentiles (80
th
to 95
th
percentiles) and in the first quintile of households.
Figure 1 shows the difference in effective tax rates for taxpayers in the higher income

6
Tax burdens are compared for a hypothetical family that consists of two wage-earning spouses and one school-age
child. The wage and salary split is assumed to be 70-30 between the two spouses. All wage and salary income is
further assumed to have been earned in the city. All other income is assumed to be split evenly. The family at each
income level is assumed to own a single family home and to reside within the confines of the city. However, at the
$25,000 income level the study assumes that the household is a renter.
7
Institute on Taxation & Economic Policy, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States,
3rd Edition, November 2009.

18

range compared to the lowest 20% of households. For example, the difference in
these two effective tax rates is 4.7% in Wisconsin. Wisconsin (and Minnesota) rank
behind only New York for the largest difference in effective individual income tax
rates. Florida and Texas do not have individual income taxes.

Table 10
State and Local Individual Income Taxes,
Effective Tax Rates by Household Income Percentiles

80-100%
State 0-20% 20-40% 40-60% 60-80% 80-95% 95-99% 99-100%
Difference
between
80
th
-95
th
and
0-20
th

percentiles
New York -3.5% 0.3% 3.4% 4.6% 5.7% 6.6% 6.7% 9.2%
Wisconsin -0.1% 2.2% 3.5% 4.1% 4.6% 4.6% 5.2% 4.7%
Minnesota -0.3% 2.1% 3.0% 3.7% 4.4% 4.9% 5.4% 4.7%
North Carolina 0.9% 2.4% 3.3% 4.0% %4.7% 5.1% 5.6% 3.8%
Michigan -0.3% 1.7% 2.7% 3.1% 3.2% 3.3% 3.1% 3.5%
Missouri 0.8% 2.1% 2.8% 3.3% 3.7% 4.0% %4.3% 2.9%
Ohio 1.5% 2.7% 3.4% 3.9% 4.4% 4.6% 5.0% 2.9%
Indiana 2.0% 3.0% 3.5% 3.6% 3.8% 3.5% 3.4% 1.8%
Pennsylvania 1.6% 2.6% 2.9% 3.1% 3.1% 2.9% 2.5% 1.5%
Illinois 1.2% 1.9% 2.2% 2.3% 2.3% 2.3% 2.2% 1.1%
Tennessee 0.0% 0.0% 0.0% 0.0% 0.0% 0.1% 0.4% 0.0%
Florida n.a.& n.a.& n.a.& n.a.& n.a.& n.a.& n.a.& n.a.&
Texas n.a.& n.a.& n.a.& n.a.& n.a.& n.a.& n.a.& n.a.&
Simple average 0.4% 2.0% 2.9% 3.4% 3.8% 4.0% 4.1% 3.4%

Source: Institute on Taxation and Economic Policy, Who Pays? A Distributional Analysis of the Tax Systems in All
50 States, November 2009.

19

Figure 1
Progressivity of Individual Income Taxes by State,

Source: Institute on Taxation and Economic Policy, Who Pays? A Distributional Analysis of the Tax Systems in All
50 States, November 2009. (Data from Table 10).

Who Bears the Burden of Wisconsin Business Tax Increases?

This section provides a different perspective on Wisconsins business tax
competitiveness. It looks at the expected additional state and local taxes imposed on a
new business investment in each of the selected states.

As legislators consider possible tax increases to close current budget gaps, the debate
often focuses on the balance of tax changes between households and businesses,
often stated as a question: Are businesses paying their fair share of taxes?
However, regardless of the initial distribution of legal business tax liabilities, the more
important policy question is who ultimately bears the burden of business tax increases
in terms of reductions in income or higher prices for goods and services. This section
provides initial estimates of who is expected to bear the burden of state business tax
increases or benefits from business tax reductions.

Initial business tax increases are ultimately redistributed from business taxpayers to
households after market prices and output levels adjust to the higher taxes. The final
burden distribution, after changes in behavior of workers, investors and consumers
shift the initial legal liabilities to households, is the economic incidence of the
business tax increase. This information is important in understanding both the

20

distributional impacts of business tax changes and the potential impact of tax
increases on a states competitiveness.

As a state increases its business taxes (relative to other states), the after-tax rate of
return on capital investment in the state is reduced. Because capital is mobile across
borders, less capital will be invested in the state, wages to in-state workers will
decrease and prices of goods and services charged to in-state residents will increase.
The real incomes of residents will be reduced by both the reduction in income and the
increase in local prices.
8
The adjustment process ends when the after-tax rate of
return on capital investments is restored to the level prior to the tax increase.

Table 11 provides state-by-state estimates of the economic incidence of a
proportionate increase in state and local business taxes in each state, holding taxes in
all other states constant. For each state, the table shows the estimated percentage of
a business tax increase that is ultimately shifted to state residents in the form of
lower wages or higher prices, both of which reduce residents real spendable income.
9

The states are ranked from highest to lowest percentage of the burden borne by in-
state residents (as consumers and workers).

The rankings show that Wisconsin is ranked 12
th
highest among all the states in terms
of the percentage of a business tax increase that is expected to be borne by state
residents in lower spendable income through either higher prices for consumer
purchases or lower wages and salaries. The Wisconsin percentage (80%) is almost 7%
above the U.S. average. For the comparison locations used in this study, Wisconsins
percentage is tied with Florida and is higher than 10 other comparison states. This tax
incidence measure indicates that, in the long run, Wisconsin business tax increases
fall primarily on state residents through a combination of higher prices of consumer
purchases and lower incomes.

The important policy insight is that any debate over Wisconsin business tax changes
is, fundamentally, a debate over changes in real, spendable incomes for Wisconsin
residents. Because states are open-border economies, the largest share of a business

8
The economic responses to tax increases will vary by industry, depending on several factors: whether goods and
services are sold in national or local markets, how high total state and local business taxes are relative to taxes in
other states, on the composition of state and local business taxes and how mobile capital and labor is among the
states. The key variable in determining the economic incidence of business tax changes is the overall business tax
rate in a state compared to the average in all other states.
9
The estimates were derived from an across-the-board ten percent increase in all state and local business taxes.
Estimates of the state and local taxes that are legal liabilities of businesses are derived from EYs 50-State Business
Tax study. The methodology used to estimate the economic incidence is explained in detail in Robert Cline, Andrew
Phillips, Joo Mi Kim and Tom Neubig, The Economic Incidence of Additional State Business Taxes, State Tax
Notes, January 11, 2010, pp. 105-126. The remaining portion of the tax increase is borne by lower incomes of
capital owners or exported to nonresidents through higher prices.

21

tax increase (or decrease) will be shifted to Wisconsin residents through lower (or
higher) spendable income.

Table 11
Economic Incidence of a Proportionate Increase in State and Local Business Taxes,
by State
Relative to Relative to
Rank State Percent U.S. Average Rank State Percent U.S. Average
1 Hawaii 85.9% 115% 27 Minnesota 76.2% 102%
2 District of Columbia 84.0% 112% 28 Nebraska 75.9% 101%
3 Maine 83.0% 111% 29 Illinois 75.9% 101%
4 Tennessee 83.0% 111% 30 Arkansas 75.6% 101%
5 New Jersey 82.2% 110% 31 Alabama 75.1% 100%
6 Washington 81.0% 108% 32 Kansas 75.1% 100%
7 Nevada 80.5% 107% 33 Mississippi 75.0% 100%
8 Rhode Island 80.4% 107% 34 Virginia 74.7% 100%
9 Florida 80.3% 107% 35 Utah 73.9% 99%
10 Colorado 80.1% 107% 36 North Carolina 72.8% 97%
11 Massachusetts 80.0% 107% 37 Oregon 72.4% 97%
12 Wisconsin 80.0% 107% 38 Idaho 72.0% 96%
13 Missouri 79.1% 106% 39 Kentucky 71.5% 95%
14 Georgia 79.0% 105% 40 Iowa 71.0% 95%
15 Connecticut 78.5% 105% 41 West Virginia 64.8% 87%
16 Ohio 78.5% 105% 42 South Dakota 64.7% 86%
17 South Carolina 78.5% 105% 43 Texas 62.5% 84%
18 Maryland 78.2% 104% 44 Montana 60.8% 81%
19 California 77.9% 104% 45 Oklahoma 60.0% 80%
20 Pennsylvania 77.8% 104% 46 North Dakota 58.0% 78%
21 Arizona 77.6% 104% 47 Delaware 57.2% 76%
22 Indiana 77.6% 104% 48 Louisiana 49.9% 67%
23 New York 77.2% 103% 49 New Mexico 46.5% 62%
24 New Hampshire 76.9% 103% 50 Alaska 36.9% 49%
25 Vermont 76.9% 103% 51 Wyoming 36.8% 49%
26 Michigan 76.8% 103% United States 75.0% 100%
Resident Tax Burdens Resident Tax Burdens

Source: Robert Cline, Andrew Phillips, Joo Mi Kim and Tom Neubig, The Economic Incidence of Additional State
Business Taxes, State Tax Notes, January 11, 2010, pp. 105-126.

22

II. Business Tax Competitiveness

Overview

This section of the report presents estimates of the state and local business taxes that
would be paid on an investment in a new or expanded facility in each location of the
selected 15 locations for representative firms in four industries. The representative
industries are industrial machinery manufacturing, information technology, financial
funds management, and the corporation management offices. (See Appendix A for a
more detailed description of the industries.)

The EY business tax competitiveness model (BTCM) was used to estimate the effective
state and local tax rates imposed on the tax bases generated by a new or expanded
investment in each location. The BTCM is a tax simulation model that incorporates the
statutory tax features for each of the major state and local business taxes in each
location. State and local taxes included in the calculations are corporate income
taxes, corporate franchise taxes, sales and use taxes on business input purchases,
and property taxes.
10
In addition to these taxes, the model also includes estimates of
statutory tax credits that are available to each firm, including investment tax credits,
job credits and research and development credits. The credit calculations do not
include credits that are negotiated on a case-by-case basis.

The BTCM provides comprehensive estimates of additional state and local business
taxes paid as a direct result of the new investment at each location. Firm financial
profiles (balance sheets and income statements) are used to estimate the tax bases
for the representative firms in each location. Features of federal, state, and local tax
systems are programmed into the model. State and local taxes are calculated over a
30-year investment horizon to recognize differences in tax provisions over time.

The tax results from the BTCM are summarized as effective tax rates (ETRs) for each
tax type and for combined state and local business taxes in each location; results are
presented for each of the four industries. ETRs are calculated as the percentage
reduction in the before-tax rate of return on each investment. For example, an ETR of
5.0% indicates that state and local taxes reduce the before-tax return by 5%.
Milwaukees business tax competitiveness is measured by ETRs before credits. The
impact of statutory credits is discussed in the last section of the analysis.

The following tables and charts present estimates of the state and local tax burdens
paid by representative businesses expanding in Milwaukee and 14 other locations. The
results are reported as ETRs measured as the percentage reduction in the pre-tax,
rate-of-return on the investments (ROI). For example, a 5% ETR indicates that state

10
Sales and use taxes collected from customers by the representative firm are not included as business taxes.

23

and local business taxes reduce the pre-tax ROI by 5%, as measured over a 30-year
time period. Results are presented for hypothetical firms in four industries: industrial
machinery manufacturing, information technology, financial funds management and
management offices. ETRs vary by industry due to differences in the composition of
income statements and balance sheets across industries that affect tax bases.

Comparison Across Industries

Table 12 summarizes the results of the competitiveness analysis. The fifteen locations
are ranked by overall state and local business tax ETRs for each of the four industries.
The overall state and local business tax ETR in Milwaukee for industrial manufacturing
is 15.6% below the average for all 15 locations. The relatively low overall ETR reflects
property tax exemptions for tangible property used in manufacturing, a relatively low
property tax rate, significant sales tax exemptions on machinery and equipment
purchases, and the favorable impact of single sales factor apportionment for the
corporate income tax.

For the industrial machinery manufacturing example, Milwaukee is ranked 13
th
highest. However, Milwaukees overall ETR is closer to competitor states than
suggested by the rankings. Milwaukees overall ETR (5.4%) is very close to the
average rate (5.5%) for the nine lowest ranked locations. This group is significantly
below the ETRs for the group of six states that have significantly higher effective tax
rates (average of 7.8%). The estimates show that the average ETRs are being pulled
up by four locations (Charlotte, Nashville, Detroit and Baltimore) with significantly
higher state and local business taxes.

Milwaukee is ranked 14
th
in overall ETR for information technology, 20% below the
15-location average. Milwaukees ETRs for financial funds management and
management offices are also below average. The management offices example is
15.6% below the average for the comparison states, while the financial funds
management example is 14.2% below the average.

The ETR rankings for the other three industries also show that Milwaukees ETRs are
similar to the tax rates in the second tier of 6 to 8 other states with below-average
ETRs. In other words, the average ETR in all of the industries are being pulled up by
significantly higher tax rates in 4 or 5 states included in the analysis. While lower than
the top tier states, Milwaukees ETRs are in line with the ETRs for the next lower tier
of locations.

State vs. Local Business Tax Burdens

Table 13 presents state and local business ERSs for state taxes and for local taxes,
primarily the property tax. The figures show that Milwaukees local business tax
burden ranking is generally lower than the state tax ranking. This is due to the
relatively low Milwaukee property taxes on commercial and industrial property.

24

Table 12
Total Effective Business Tax Rates and Rankings among Comparison States,
by Industry and Location

Manufacturing
Information Technology Financial Funds Management Management Offices
Location ETR

Location ETR

Location ETR

Location ETR
Charlotte, NN 8.4%

Baltimore, Maryland 15.9%


Nashville, Tennessee 5.3%



Pittsburgh, PA 5.1%
Detroit, Michigan 8.1%

Charlotte, NC 14.3%

Pittsburgh, PA 5.7%



Charlotte, NC 5.6%

Charlotte, NC 5.0%
Pittsburgh, PA 7.3%

Pittsburgh, PA 11.6%

Minneapolis, MN 4.8%

Minneapolis, Minnesota 6.9%

St. Louis, Missouri 11.5%


Orlando, Florida 3.4%
Kansas City, Missouri 6.0%


Buffalo, New York 4.3%


Chicago, Illinois 11.2%





Milwaukee, WI 2.7%
Indianapolis, Indiana 5.6%




Kansas City, MO 10.6%

Milwaukee, WI 3.6%




Milwaukee, WI 5.4%

Dallas, Texas 10.0%


Dallas, Texas 5.2%

Milwaukee, WI 9.4%

Cleveland, Ohio 2.6%



Dallas, Texas 1.8%

Dallas, Texas 0.7%
15-Location Average 6.4% 15-Location Average 11.7% 15-Location Average 4.2% 15-Location Average 3.2%

25

Table 13
State and Local Effective Business Tax Rates and Rankings, by Industry and Location

Industrial
Machinery
Manufacturing
Information
Technology
Financial Funds
Management
Management
Offices
State City ETR Rank ETR Rank ETR Rank ETR Rank
A. Total State and Local Taxes
FL Orlando
5.8% 8 10.9% 10 4.1% 8 3.4% 6
IL Chicago
5.6% 12 11.2% 8 3.7% 9 2.8% 8
IN Indianapolis
5.6% 10 10.6% 12 3.6% 10 2.6% 10
MD Baltimore
7.8% 4 15.9% 1 5.9% 1 5.0% 3
MI Detroit
8.1% 3 12.2% 4 4.4% 6 2.3% 13
MN Minneapolis
6.9% 6 11.3% 7 4.8% 5 3.4% 5
MO Kansas City
6.0% 7 10.6% 11 3.5% 12 2.4% 12
MO St. Louis
5.7% 9 11.5% 6 3.5% 13 2.5% 11
NY Buffalo
5.6% 11 11.1% 9 4.3% 7 3.2% 7
NC Charlotte
8.4% 1 14.3% 3 5.6% 4 5.0% 4
OH Cleveland
4.8% 15 9.1% 15 2.6% 14 1.3% 14
PA Pittsburgh
7.3% 5 11.6% 5 5.7% 3 5.1% 2
TN Nashville
8.2% 2 15.6% 2 5.8% 2 5.3% 1
TX Dallas
5.2% 14 10.0% 13 1.8% 15 0.7% 15
WI Milwaukee
5.4% 13 9.4% 14 3.6% 11 2.7% 9
B. Total State Taxes
FL Orlando
4.3% 7 8.8% 7 3.5% 6 3.3% 5
IL Chicago
4.3% 10 8.1% 9 2.9% 9 2.6% 8
IN Indianapolis
3.5% 13 8.2% 8 2.9% 11 2.4% 10
MD Baltimore
6.5% 3 11.6% 2 5.3% 1 4.9% 4
MI Detroit
5.7% 6 8.9% 6 3.1% 7 2.1% 11
MN Minneapolis
5.7% 5 10.0% 5 3.8% 5 3.2% 6
MO Kansas City
3.6% 12 6.7% 14 2.3% 13 2.0% 13
MO St. Louis
3.6% 11 6.7% 13 2.3% 12 2.0% 12
NY Buffalo
4.3% 8 7.1% 10 3.0% 8 2.9% 7
NC Charlotte
7.2% 1 11.2% 3 5.1% 3 4.9% 3
OH Cleveland
2.7% 15 6.3% 15 0.7% 15 0.2% 15
PA Pittsburgh
6.3% 4 10.2% 4 4.9% 4 4.9% 2
TN Nashville
6.7% 2 12.2% 1 5.2% 2 5.2% 1
TX Dallas
3.0% 14 6.9% 12 1.1% 14 0.5% 14
WI Milwaukee
4.3% 9 6.9% 11 2.9% 10 2.5% 9
C. Total Local Taxes
FL Orlando
1.5% 8 2.1% 13 0.6% 14 0.1% 14
IL Chicago
1.3% 10 3.1% 7 0.9% 7 0.2% 7
IN Indianapolis
2.1% 4 2.4% 12 0.8% 9 0.2% 9
MD Baltimore
1.4% 9 4.1% 2 0.6% 13 0.2% 11
MI Detroit
2.4% 2 3.3% 6 1.2% 4 0.3% 5
MN Minneapolis
1.2% 12 1.3% 15 1.0% 6 0.2% 6
MO Kansas City
2.4% 1 3.9% 4 1.3% 3 0.5% 3
MO St. Louis
2.1% 5 4.7% 1 1.2% 5 0.5% 2
NY Buffalo
1.3% 11 3.9% 3 1.3% 2 0.3% 4
NC Charlotte
1.2% 13 3.1% 9 0.5% 15 0.1% 15
OH Cleveland
2.0% 6 2.8% 10 1.9% 1 1.2% 1
PA Pittsburgh
1.0% 15 1.4% 14 0.8% 8 0.2% 10
TN Nashville
1.5% 7 3.4% 5 0.6% 12 0.1% 13
TX Dallas
2.3% 3 3.1% 8 0.7% 10 0.2% 8
WI Milwaukee
1.1% 14 2.4% 11 0.7% 11 0.2% 12

26

Composition of Business Tax Rates by Type of Tax

Table 14 compares the ETRs by industry and location for each of the major state and
local tax types. This information can be used to identify the relative size of the different
types of tax burdens for each industry. The figures clearly show that different tax types
account for different shares of the overall state and local tax burdens in Milwaukee.

Corporate income taxes account for a much larger share of business taxes for financial
funds management and management offices. This partly reflects the operation of the
single sales factor apportionment formula. These two industries are assumed to have a
larger percentage of their sales within the state compared to the other two industries.

For information technology, sales taxes on business inputs account for the largest share
of the business tax burden, while unemployment taxes account for the largest
percentage of business taxes for industrial machinery manufacturing.

Because different tax types account for different shares of the combined state and local
tax burdens for the selected industries, business tax reform in Wisconsin will likely
involve a package of changes affecting multiple business taxes.

Figures 2 and 3 provide graphs of the ETRs by industry (figures a through d) for both
combined state and local business taxes (Figure 2) and state business taxes only (Figure
3).

27

Table 14
Summary of Effective Business Tax Rates, by Tax Type and Location

Industrial
Manufacturing
Information
Technology
Financial
Management
Management
Offices
A. Total State and Local Taxes
FL Orlando 5.8% 8 10.9% 10 4.1% 8 3.4% 6
IL Chicago 5.6% 12 11.2% 8 3.7% 9 2.8% 8
IN Indianapolis 5.6% 10 10.6% 12 3.6% 10 2.6% 10
MD Baltimore 7.8% 4 15.9% 1 5.9% 1 5.0% 3
MI Detroit 8.1% 3 12.2% 4 4.4% 6 2.3% 13
MN Minneapolis 6.9% 6 11.3% 7 4.8% 5 3.4% 5
MO Kansas City 6.0% 7 10.6% 11 3.5% 12 2.4% 12
MO St. Louis 5.7% 9 11.5% 6 3.5% 13 2.5% 11
NY Buffalo 5.6% 11 11.1% 9 4.3% 7 3.2% 7
NC Charlotte 8.4% 1 14.3% 3 5.6% 4 5.0% 4
OH Cleveland 4.8% 15 9.1% 15 2.6% 14 1.3% 14
PA Pittsburgh 7.3% 5 11.6% 5 5.7% 3 5.1% 2
TN Nashville 8.2% 2 15.6% 2 5.8% 2 5.3% 1
TX Dallas 5.2% 14 10.0% 13 1.8% 15 0.7% 15
WI Milwaukee 5.4% 13 9.4% 14 3.6% 11 2.7% 9
B. State and Local Sales Tax
FL Orlando 0.9% 10 6.0% 11 0.3% 13 0.1% 10
IL Chicago 1.2% 5 8.0% 2 0.5% 3 0.2% 4
IN Indianapolis 0.8% 12 6.1% 10 0.4% 9 0.1% 13
MD Baltimore 1.2% 4 6.8% 7 0.4% 8 0.1% 9
MI Detroit 0.9% 11 5.6% 14 0.3% 14 0.1% 11
MN Minneapolis 1.2% 7 7.1% 4 0.4% 6 0.2% 3
MO Kansas City 0.8% 13 5.9% 12 0.4% 12 0.1% 12
MO St. Louis 0.8% 13 7.0% 6 0.4% 7 0.2% 7
NY Buffalo 0.7% 15 7.1% 5 0.4% 5 0.2% 6
NC Charlotte 1.4% 3 7.6% 3 0.5% 1 0.2% 8
OH Cleveland 1.2% 6 6.6% 9 0.5% 4 0.2% 1
PA Pittsburgh 1.0% 8 5.8% 13 0.4% 11 0.1% 14
TN Nashville 1.5% 2 8.6% 1 0.5% 2 0.2% 2
TX Dallas 1.7% 1 6.6% 8 0.4% 10 0.2% 5
WI Milwaukee 0.9% 9 4.9% 15 0.3% 15 0.1% 15
C. State and Local Corporate Income Tax
FL Orlando 2.8% 4 2.9% 4 3.1% 5 3.1% 5
IL Chicago 1.3% 10 1.3% 10 2.0% 10 2.0% 9
IN Indianapolis 1.6% 8 1.6% 9 2.3% 9 2.3% 8
MD Baltimore 4.3% 1 4.4% 1 4.7% 1 4.7% 1
MI Detroit 2.4% 6 2.2% 7 2.5% 7 1.9% 11
MN Minneapolis 2.3% 7 2.2% 6 3.1% 6 3.1% 6
MO Kansas City 1.2% 12 1.3% 12 1.9% 12 1.9% 12
MO St. Louis 1.2% 12 1.3% 12 1.9% 12 1.9% 12
NY Buffalo 1.3% 11 1.3% 11 2.0% 11 2.0% 10
NC Charlotte 3.6% 2 3.7% 2 4.0% 2 3.9% 2
OH Cleveland 1.2% 14 1.2% 14 1.2% 14 1.0% 14
PA Pittsburgh 2.4% 5 2.5% 5 3.3% 4 3.2% 4
TN Nashville 3.4% 3 3.4% 3 3.7% 3 3.7% 3
TX Dallas 0.9% 15 0.8% 15 0.7% 15 0.3% 15
WI Milwaukee 1.6% 9 1.6% 8 2.4% 8 2.4% 7

28

Table 14 (cont.)
Summary of Effective Business Tax Rates, by Tax Type and Location

Industrial
Machinery
Manufacturing
Information
Technology
Financial
Funds
Management
Management
Offices
D. Other State Taxes (unemployment insurance and corporate franchise taxes)
FL Orlando 0.6% 15 0.3% 15 0.1% 15 0.0% 15
IL Chicago 2.1% 7 1.4% 5 0.5% 5 0.5% 5
IN Indianapolis 1.1% 12 0.5% 12 0.1% 12 0.0% 12
MD Baltimore 1.0% 13 0.5% 13 0.1% 13 0.0% 13
MI Detroit 2.5% 2 1.2% 6 0.3% 8 0.0% 8
MN Minneapolis 2.4% 4 1.2% 7 0.3% 9 0.0% 9
MO Kansas City 1.7% 10 1.0% 9 0.3% 7 0.2% 7
MO St. Louis 1.7% 9 1.0% 8 0.3% 6 0.2% 6
NY Buffalo 2.3% 5 1.8% 4 0.8% 4 0.8% 4
NC Charlotte 2.5% 3 1.8% 3 0.8% 3 0.8% 3
OH Cleveland 1.5% 11 0.7% 11 0.2% 11 0.0% 11
PA Pittsburgh 3.1% 1 2.7% 1 1.3% 1 1.6% 1
TN Nashville 2.3% 6 2.2% 2 1.1% 2 1.4% 2
TX Dallas 0.7% 14 0.3% 14 0.1% 14 0.0% 14
WI Milwaukee 1.9% 8 0.9% 10 0.2% 10 0.0% 10
E. Local Property Tax
FL Orlando 1.4% 6 1.6% 8 0.5% 14 0.1% 13
IL Chicago 1.0% 13 0.6% 15 0.7% 9 0.1% 12
IN Indianapolis 2.1% 3 2.4% 4 0.8% 6 0.2% 6
MD Baltimore 1.4% 7 4.1% 1 0.6% 12 0.2% 7
MI Detroit 2.4% 1 3.3% 2 1.2% 1 0.3% 1
MN Minneapolis 1.1% 10 0.8% 12 1.0% 3 0.2% 4
MO Kansas City 2.2% 2 2.5% 3 0.9% 4 0.2% 3
MO St. Louis 2.0% 5 2.1% 6 0.8% 5 0.2% 5
NY Buffalo 1.3% 8 0.9% 11 1.2% 2 0.2% 2
NC Charlotte 1.0% 12 1.1% 10 0.3% 15 0.1% 15
OH Cleveland 0.9% 14 0.6% 14 0.7% 8 0.1% 11
PA Pittsburgh 0.9% 15 0.6% 13 0.8% 7 0.1% 10
TN Nashville 1.2% 9 1.3% 9 0.5% 13 0.1% 14
TX Dallas 2.1% 4 2.2% 5 0.7% 10 0.1% 8
WI Milwaukee 1.0% 11 2.0% 7 0.7% 11 0.1% 9

29

Figure 2a: State and Local Effective Tax Rates for Industrial Machinery Manufacturing
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
Corporate income
and franchise tax
Sales and gross
receipts tax
Other tax
Property tax
Average for
comparison
cities (6.4%)

Figure 2b: State and Local Effective Tax Rates for Information Technology
0%
2%
4%
6%
8%
10%
12%
14%
16%
Corporate income
and franchise tax
Sales and gross
receipts tax
Other tax
Property tax
Average for
comparison
cities (11.7%)

30

Figure 2c: State and Local Effective Tax Rates for Financial Funds Management
0%
1%
2%
3%
4%
5%
6%
Corporate income
and franchise tax
Sales and gross
receipts tax
Other tax
Property tax
Average for
comparison
cities (4.2%)

Figure 2d: State and Local Effective Tax Rates for Management Offices
0%
1%
2%
3%
4%
5%
6%
Corporate income
and franchise tax
Sales and gross
receipts tax
Other tax
Property tax
Average for
comparison
cities (3.2%)

31

Figure 3a: State Effective Tax Rates for Industrial Machinery Manufacturing
0%
1%
2%
3%
4%
5%
6%
7%
8%
Corporate income
and franchise tax
Sales and gross
receipts tax
Other tax
Average for
comparison
cities (4.8%)

Figure 3b: State Effective Tax Rates for Information Technology
0%
2%
4%
6%
8%
10%
12%
14%
Corporate income
and franchise tax
Sales and gross
receipts tax
Other tax
Average for
comparison
cities (8.7%)

32

Figure 3c: State Effective Tax Rates for Financial Funds Management
0%
1%
2%
3%
4%
5%
6%
Corporate income
and franchise tax
Sales and gross
receipts tax
Other tax
Average for
comparison
cities (3.2%)

Figure 3d: State Effective Tax Rates for Management Offices
0%
1%
2%
3%
4%
5%
6%
Corporate income
and franchise tax
Sales and gross
receipts tax
Other tax
Average for
comparison
cities (2.9%)

33

Impact of Statutory Credits on Business Tax Liabilities

Table 15 below reports the change in the effective tax rates for the selected industries
after any reductions due to statutory tax credits designed to encourage new in-state
capital investment, increased employment and higher research and development
expenditures. The comparison of the effect of credits on ETRs indicates how tax credits
affect a states business tax competitiveness.

Table 15
Percentage Point Reduction in State and Local Business Effective Tax Rates
Due to Statutory Credits

State City
Industrial
Machinery
Manufacturing
Information
Technologies/Data
Processing
Financial
Funds
Management
Management
Offices
FL Orlando -0.9% 0.0% 0.0% 0.0%
IL Chicago 0.0 0.0 0.0 0.0
IN Indianapolis -1.6 -0.9 -0.9 0.0
MD Baltimore -2.5 -0.7 -0.8 0.0
MI Detroit -1.2 -0.5 -0.4 0.0
MN Minneapolis -0.7 -0.2 -0.2 0.0
MO Kansas City -0.7 -0.5 -0.8 -0.1
MO St. Louis -0.7 -0.5 -0.8 -0.6
NY Buffalo -0.4 0.0 0.0 0.0
NC Charlotte -1.5 -0.7 -0.4 0.0
OH Cleveland -0.3 -0.2 -0.2 0.0
PA Pittsburgh -1.1 -0.3 -0.4 0.0
TN Nashville -0.9 0.0 0.0 0.0
TX Dallas -0.8 -0.6 -0.5 0.0
WI Milwaukee -1.2% -1.1% -0.4% 0.0%

34

III. Combined Business and Household Tax Burdens

This section expands the business tax competitiveness analysis to include individual
income taxes and property taxes on residential property that would be paid by the
employees that are associated with the expansion of the representative industries. As
noted earlier in the comparative assessment, Wisconsin imposes relatively high property
taxes on residential property and has one of the most progressive individual income
taxes. The business tax competitiveness analysis is expanded to include this additional
tax burden imposed on employees related to new business investments in each location.

The employee income and property tax burden calculations apply estimated effective tax
rates (taxes paid divided by income) by income level in each state to the average annual
compensation paid to the added employees for each expansion.
11
This calculation
produces an estimate of the total individual income and residential property taxes paid
by the new employees. The employee tax amount is then converted into an employee tax
differential for each industry by subtracting the employee taxes in the lowest location
from each locations employee tax amounts.
12
In the final step of the calculation, the
employee tax differential is added to the business taxes on the expansion to derive an
aggregate business and employee tax amount for each location.

Table 16 compares the combined business and employee tax burdens for each industry
at each of the 15 locations. To simplify the comparisons, the combined business and
employee tax amounts are expressed as index numbers relative to the tax level in the
lowest tax location for each industry. For example, the total state and local taxes
generated by the expansion for the industrial machinery manufacturer in Milwaukee is
3.13 times the level of taxes on the same expansion in Nashville, the lowest tax location.
In other words, the combined taxes in Milwaukee are 213% greater than the amount in
Nashville. The index numbers can also be compared for different locations. A
comparison of Milwaukees index of 3.13 to Charlottes index of 2.45 shows, for
example, that Milwaukees combined taxes are 28% higher than the taxes in Charlotte.

As shown in a comparison of rankings in Table 12 (business taxes) and Table 16
(combined taxes), Milwaukees tax rankings increase significantly with the addition of the
individual income and residential property taxes paid by employees. Milwaukee now

11
The effective tax rates are taken from the Institute on Taxation & Economic Policy (ITEP) study, Who Pays?,
referred to in the inventory section earlier. See Appendix B for a more detailed explanation of the methodology used to
estimate combined business and household tax burdens.
12
The employee tax differential is assumed to affect an employees decision about taking a new job in each location.
Employees are assumed to weigh the balance of state and local spending and taxation in making location choices. To
the extent that higher state and local individual income and property taxes in one location exceed the value employees
place on state and local expenditures in that location, businesses may have to compensate employees with higher wages
to offset this difference. The calculations of the combined business and employee taxes add the full employee tax
differential to the estimated business taxes on the expansion. No adjustment is made to reflect differences in state and
local spending levels among the locations that may offset a portion of the tax differential.

35

emerges as one of the least competitive locations for the machinery manufacturing and
information technology industries. Milwaukee ranks 3
rd
highest for machinery
manufacturing, just behind Buffalo and Detroit. For the information technology
expansion, Milwaukee is tied with Baltimore as the highest taxed location.

36

Table 16
Index of Total Tax Burden and Rankings among Comparison States
by Industry and Location

Manufacturing
Information Technology Financial Funds Management Management Offices
Location Index

Location Index

Location Index

Location Index
Buffalo, New York 3.21

Baltimore, Maryland 1.96


Nashville, Tennessee 7.92
Detroit, Michigan 3.21

Milwaukee, Wisconsin 1.95

Chicago, Illinois 2.93

Pittsburgh, PA 7.77


Pittsburgh, PA 2.78

Minneapolis, Minnesota 2.69

Charlotte, NC 1.84

Minneapolis, MN 2.74

Charlotte, NC 7.69
Charlotte, NC 2.45


Charlotte, NC 2.67

Cleveland, Ohio 1.99



Orlando, Florida 5.16
St. Louis, Missouri 1.91




Pittsburgh, PA 1.39





Pittsburgh, PA 1.61



Indianapolis, Indiana 3.99
Kansas City, Missouri 1.47









Dallas, Texas 1.01




Dallas, Texas 1.00

Dallas, Texas 1.00

Dallas, Texas 1.00

37

As reported in Table 12 (business tax rankings), Milwaukee ranks 13
th
and 14
th

highest for these two industries. The combination of the relatively large number of
employees added in these two expansions and the relatively high income and property
taxes paid by Milwaukee employees explains the significant increase in Milwaukees
tax rankings in Table 16 compared to the business tax rankings in Table 12.

Milwaukee ranks 7
th
for the combined taxes on the financial funds management
expansion and 9
th
for the management offices expansion. The rankings for business
taxes alone (Table 12) are 11
th
and 9
th
, respectively. Adding in the employee income
and property tax amounts has less of an impact on the rankings for these two
industries because of the relatively smaller number of new employees related to the
expansions and the fact that Milwaukees wages are closer to the average for the
comparison locations in these industries.

In summary, for the combined business and employee tax burdens, Milwaukee ranks:
3
rd
in industrial machinery manufacturing (compared to 13
th
for business taxes
only),
2
nd
in information technology (compared to 14
th
for business taxes),
7
th
in financial funds management (compared to 11
th
for business taxes), and
9
th
in management offices (no change in the ranking).

The higher Milwaukee rankings for combined business and employee taxes are due to
Milwaukees relatively high individual income and property tax effective tax rates and
employee earnings. In addition, the total employee taxes are relatively large
compared to the business tax total given the significant number of employees added,
particularly in the manufacturing and information technology expansions. As a result,
the rankings for the combined business and employee tax burdens are more
influenced by the individual income tax and residential property taxes paid by
employees.

A-1

Appendix A
Industries Used in the Business Competitiveness Analysis

The business tax competitiveness analysis in Section II estimates the state and local
effective tax rates paid on new investments or expansions in selected locations by
representative firms in the following four industries selected by MMAC. The industry
descriptions are from the North American Industry Classification System (NAICS). The
net income and balance sheet information for the representative firm in each industry
comes from the IRS Statistics of Income, Corporation Tax Reports.

Machinery Manufacturing

The manufacturing industry representative firm is based on IRS data for the Industrial
Machinery Manufacturing NAICS industry (3332). Firms in this industry group design
and manufacture machinery for specific industrial applications.

Financial Funds Management

The financial data for this representative firm will be based on the IRS information
reported for the Other Financial Investment Activities NAICS industry (5239) and the
Securities and Commodity Exchanges NAICS industry (5232). Firms in this group of
industries are primarily engaged in managing portfolio assets of others on a fee or
commission basis, acting as principals in buying or selling financial contracts,
providing other investment services, and operating marketplaces for stocks, bonds
and commodity contracts.

Management Offices

The financial data for this firm will be based on IRS data for the Corporate, Subsidiary,
and Regional Managing Offices NAICS industry (551114) and the Offices of Other
Holding Companies NAICS industry (551112). Firms in this industry are primarily
engaged in administering, overseeing, and managing other establishments of a
company and in serving as non-bank holding companies.

Information Technologies

The financial data for this firm will be based on IRS information for the Data
Processing, Hosting, and Related Services NAICS industry (51821). Firms in this
industry are primarily engaged in providing data processing services and
infrastructure for housing data processing.

B-1

Appendix B
Methodology for Estimating Combined
Business and Employee Taxes

Employee Tax Estimates

This study uses estimates of the effective statewide tax rates (taxes divided by
income) from the state-by-state tax burden distributions reported in the Institute on
Taxation & Economic Policys (ITEP) November 2009 study, Who Pays? A
Distributional Analysis of the Tax Systems in All 50 States. The study reports effective
tax rates for residential property taxes and personal income taxes by family income
quintiles.

Bureau of Labor Statistics (BLS) county-level average annual pay information, by
industry, from the Quarterly Census of Employment and Wages was used to determine
the income level of the added employees for each of the four industry expansions in
each location. The ITEP state and local effective income and property tax rates from
the fourth quintile were applied to the total employee earnings to estimate the total
employee tax amounts in each location. The estimates do not include an offset for
federal deductibility of state and local income and property taxes for itemizers.

For each location and industry, annual employee tax costs were estimated for the 30-
year time horizon used for the business tax competitiveness analysis. The taxes were
summarized as the net present value of the 30-year tax stream. To determine the
relative employee tax costs, the total employee tax cost amount for the lowest
employee tax location (Nashville for the manufacturing example, and Dallas for the
other three examples) was subtracted from each employee tax amount. The
differences were added to the present discounted values of the business tax totals
estimated in the business competitiveness analysis. Locations then were ranked by
the combined business and employee tax amounts.

To facilitate interpretation of the tax differential results, the combined tax dollar
amounts were transformed into an index equal to the ratio of combined taxes in each
location to the taxes in the lowest tax location for each industry. The lowest tax
location has an index value of 1.00. For the Milwaukee industrial machinery
manufacturing industry the index number is 3.13. In other words, the expansion in
Milwaukee would be subject to $313 in direct business or employee indirect taxes, or
$213 additional dollars, for every $100 of combined taxes paid in Nashville.

Ernst and Young Tax Burden Study

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Ernst and Young Tax Burden Study

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