State Tax Policy Cheatsheet - Early, Growth and Mature Stage Companies
Many people believe state corporate income tax to be a major revenue source. It’s not as big as you might think. Corporate income tax collections account for only 5.3 percent of state tax collections and just 3.9 percent of state general revenue.
In total, forty-four states levy corporate income tax, four states (WA, TX, OH, NV) impose gross receipt tax and two states (SD, WY) tax neither income nor receipts. Tax policy is not just about the generation of revenues from taxing profits or revenue, however. Depending on the company stage there are incredibly impactful tax parameters -- from the personal to the corporate -- that will dictate the degree to which industry thrives.
How can you get a handle on which tax policy levers matter most?
State Tax Policy Cheatsheet from Start-up to Enterprise
From R&D, to capital raising to tax impacts on founders, the start-up state taxation picture has a handful of key parameters to look out for. Here are some of the most impactful ones:
i. Loss carryforwards: since losses typically persist in a start-up for a number of years, loss carryforwards are important economic leverage for founders.
ii. Small business expensing: expensing limits set by tax laws dictate how much a business may deduct for assets purchased and placed into service. Strong correlations have been demonstrated between expensing limits and job creation:
iii. Pass-through income taxation on LCCs and S-Corps: many early stage companies choose non-corporate legal structures and therefore are more affected by personal tax than corporate tax.
iv. Investor tax credits: ask any start-up founder what their biggest pain point is and you are likely to hear about their struggles raising outside capital -- tax credits help de-risk the very high-risk/high-return profile of early stage investing and help bring capital to the market.
What do the economic impact data of your industry look like and how effective is your state tax policy for the early stage companies?
Growth stage companies require economic policy that pours fuel on the fire they’ve worked tirelessly to create. Here are a few state tax policy categories your member companies need working in their favor:
i. Capital gains treatment: from equity grants to employees, to appreciation of share value, capital gains treatment is big. The more tax policy penalizes the use of stock as compensation or taxes the appreciation of enterprise value, the harder it is to grow.
ii. Research and development tax credits: for many sectors, including Technology, BioTech, Energy and even Manufacturing, R&D investments are essential for sustained competitiveness. Enable your member companies to drive innovation by advocating for rich R&D tax credits.
iii. Sales taxation of business equipment: this tax can substantially increase the cost of building a multi-million dollar manufacturing facility and, thus, make a state with no sales tax on equipment a far more attractive location.
To win in state tax lobbying you will need a strong narrative to make the case for your growth stage companies.
At the mature stage we need to focus on profitability and encouraging the continued investment not just in the business, but in the local market. A new plant or distribution facility means scores of new jobs and big wins for the policymakers who helped foster the growth.
i. Depreciation: accelerated deductions dramatically reduce the cost of new investment by realizing more of the tax benefit, upfront. Additional consideration here should be given to conformity to federal bonus depreciation in order to allow full use of federal incentives.
ii. Apportionment of multi-state income: firms with nexus in more than one state must use state rules to apportion their profits, determining how much of their income each state may tax.
iii. Research and development tax credits: for a mature company, investing in R&D is more than just remaining competitive, it will likely dictate whether or not the company will continue to exist. Just think of this: in the last 15 years, 52% of the Fortune 500 companies have disappeared.
Creativity and new ways of telling your story are needed in order to make your case for the “anchor tenant” companies in your region.
Create a smart tax lobbying campaign.
The election was won on smart data strategy. You need a smart, data-driven lobbying campaign, or risk coming in second place on key issues. Fortunately, eImpact Report was purpose built to help you win.