Study shows Maine state and local "effective business tax rate" among highest in nation

Maine state and local business taxes grew less than the national average, at 2.4% between 2010 and 2011 but actual “effective business tax rate” is among highest in the country

The Council On State Taxation (COST) announced the release of their tenth annual study of state and local business taxes.

The report, “Total State and Local Business Taxes: State-by-State Estimates for Fiscal Year 2011,” prepared by Ernst & Young LLP, shows all state and local business taxes paid in each of the 50 states and the District of Columbia.

Maine state and local business tax rates grew only 2.4 percent from 2010 to 2011, one of the smallest rates of growth in the country. Only seven other states tax rates grew less, including Florida, Virginia and Michigan. New Hampshires state and local tax rate grew at 6 percent over the same time period.

That’s the good news for Maine. The bad news is that the report shows that Maine has one of the highest “total effective business tax rates” in the country at 6.9 percent. The “effective rate” is measured as the “ratio of state and local business taxes to private-sector gross state product, which is the total value of a state’s annual production of goods and services,” according to the report. This means that for the size of our private sector, Maine’s business tax burden is very high.

Maine’s 6.9 percent “effective business tax rate” is well above the national average of 5 percent and is listed among the “higher tax rate” states along with Vermont, North Dakota, Alaska, Wyoming and West Virginia, all of whom have “effective rates” above 6 percent.

The taxes included in the study include business property taxes, sales and excise taxes on business inputs, gross receipts taxes, corporate income and franchise taxes, unemployment insurance taxes, pass-through business taxes and other state and local taxes that are the statutory liability of business taxpayers. Businesses nationwide paid a total $644 billion in state and local taxes in Fiscal Year 2011.

In addition to presenting tax estimates for the most recent fiscal year, the study also examines business taxes over the past business cycle and describes the impact of the recession and recovery on tax collections.

According to (COST) key findings of the study include:

• Businesses paid $644 billion in state and local taxes in Fiscal Year (FY) 2011, an increase of 4.5% from FY 2010.

• After falling by 0.8% in Fiscal Year 2009 and 0.6% in FY 2010, state and local business taxes grew $27.9 billion (4.5%) in FY 2011, with total state business taxes increasing by 9.8% and total local business taxes declining by 0.8%. 

• Property taxes on business property decreased by an estimated 1.5% this year, totaling $244.9 billion in FY 2011, or 38.0% of total state and local business taxes.  Sales tax on business inputs and capital equipment totaled $129.7 billion, or 20.1% of business taxes, which is an increase of 5.2% from FY 2010.  The property tax and a significant portion of sales taxes paid by business are taxes on capital invested within a state.

• Although the corporate income tax has been the focus of significant debate in a number of state legislatures during recent years, FY 2011 collections were $46.3 billion, only 7.2% of total state and local business taxes.  Corporate income tax collections grew by 8.5% in FY 2011.  Individual income taxes on pass-through business income account for 5.6% of total state and local business taxes and grew by nearly 10.0% in FY 2011.

Other findings of the study showed the makeup of state and local business taxes nationwide. More than one-third of all state and local business taxes are taxes on business property, representing 38 percent of all taxes in the country. Another 20 percent of state and local business taxes is made up of sales tax on “business inputs,” while “excise, utility and insurance taxes” make up an additional 12.6 percent of the tax “pie”.

Business licenses and other business taxes also hit double digits, representing 10 percent of total tax costs. Corporate income tax, unemployment insurance tax and individual income tax on business income all represent less than 10 percent of total state and local business taxes.

According to COST, Maine’s annual state and local tax cost to businesses totals about $3 billion. More than half that total, $1.7 billion, includes property taxes assessed to Maine businesses. By comparison, New Hampshire totals just $2.6 billion per year in business taxes, including $1.2 billion in property taxes, and zero in sales tax. Maine businesses paid $400 million in sales tax in 2011.

Besides property taxes, the majority of Maine state and local business taxes are represented by sales tax, at 12.2 percent of all taxes and excise taxes, with account for 8.8 percent of Maine’s business taxes.