A Simulation of Business Taxes in New York City and Other Locations
This report describes the results of a model that simulates major state and local taxes on businesses in New York City and 8 additional locations. It also simulates taxes in a fictitious “federal tax only” location where firms are subject to the federal corporate income tax but not to state and local taxes, to isolate the role of these taxes.
The locations examined are:
- New York City
- A location in the Metropolitan Transportation Authority region (Westchester County)
- An upstate New York location (Albany County)
- California (Los Angeles)
- Connecticut (Hartford)
- Florida (Miami-Dade)
- Massachusetts (Boston)
- New Jersey (Newark)
- Texas (Houston)
The model is designed to examine business taxes taking into account important complexities:
- Multiple taxes – state and local corporate income taxes, sales taxes on business purchases, property taxes, unemployment insurance taxes, and the federal corporate income tax
- Interactions among taxes – such as deductibility of state and local taxes against the federal corporate income tax
- The dynamic nature of taxes - taking into account features that can change over time, such as depreciation deductions and investment tax credits
Simple comparisons such as top tax rates, or tax revenue as a percentage of the economy in a single year, or analysis of a single tax, do not take these complexities into account. To account for important features of the tax system, the model examines the impact of multiple taxes – state and local corporate income taxes, sales taxes, property taxes, unemployment insurance taxes, and the federal corporate income tax – over a 60-year period following a 10 percent business expansion in each of the possible locations. It then computes the after-tax rate of return for the expansion in each location, and computes effective tax rates (the percentage reduction in the rate of return).
The key conclusions are:
- Combined federal, state, and local taxes reduce the rate of return on new business investment significantly – about 36-50 percent, depending on location and industry
- Most of this is due to federal tax – typically 34-36 percentage points. State and local taxes account for the remainder.
- Differences across locations often are relatively small. In most cases the after-tax rate of return in the highest-tax jurisdiction is about 0.9 to 1.5 percentage points lower 4 than rate of return in the lowest-tax jurisdiction. (While seemingly small, over many years the cumulative impact of differences of this magnitude can be substantial.)
- New York City had the highest or second-highest state-local taxes in most industries examined, under most scenarios examined.
The tables on the following pages show the main results from the analysis for 2006, and for changes between 1994 and 2006. A series of appendix tables provide detailed results for both years.
The model was also used to simulate the key elements of the corporate tax changes adopted by New York State with the 2007-08 state budget. Among other things, those changes will reduce the top state corporate tax rate from 7.5 percent to 7.1 percent, provide a 6.5 percent rate for manufacturers (effective in 2008), and accelerate the adoption of a single-receipts factor for apportioning income to New York. These changes will reduce overall effective tax rates throughout the state, including New York City. For the representative firms included in the model, the changes would reduce the average combined federal-state-local effective tax rate in New York City from 42.1 percent (as shown in the tables below for 2006) to 40.9 percent, with manufacturing firms generally doing somewhat better than other firms. In most cases, the change to the apportionment formula generally would have a larger impact than the rate change. The changes would be significant enough to move New York City from the number 1 ranking to the number 2 ranking in several industries, although it would retain its overall ranking as the highest-tax location.