Ernst and Young Tax Burden Study Exec Summary

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Executive Summary:Analysis of Milwaukees

Relative Business TaxBurdens

September 2010


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Ernst & Young LLP

875 East Wisconsin Avenue

Milwaukee WI 53202

Tel: 414.273.5900

Fax: 414.223.7203

www.ey.com

Metropolitan Milwaukee Association of Commerce 27 September 2010756 North Milwaukee Street

Milwaukee, WI 53202-3719

Dear MMAC Board Member:

The Metropolitan Milwaukee Association of Commerce (MMAC) has engaged Ernst & YoungLLP (EY) to examine how Milwaukee compares to fourteen other selected locations in terms ofstate and local business tax competitiveness. This project has been accomplished in a phasedapproach, resulting in this Executive Summary, for your consideration.

In Phase 1 of the project, EY estimated the state and local business tax burdens that areimposed on four representative businesses (industries) expanding at each location. These

tax burdens are the legal liabilities of each business, including corporate income andfranchise taxes, sales taxes on business input purchases and property taxes. MMACmember companies provided detailed tax information to support the businesscompetitiveness analysis.

EY presented initial results of the business tax comparison to the MMAC Board in lateMay. As a result of this presentation and at the request of the MMAC, EY discussed theresults of Phase 1 in more detail at a Director of Tax Roundtable session in July.

Based on this follow-up discussion, MMAC asked EY to perform Phase 2 by expandingthe initial study to include individual income taxes and property taxes on residentialproperty paid by employees associated with the expansion. Because Milwaukee imposes

particularly high property taxes on residential property and individual income taxes,incorporating these personal taxes imposed on employees is particularly important ingauging the overall business tax competitiveness of Milwaukee relative to its competitorstates.

The following Executive Summary reports on the results of the EY analysis. This Summary isbeing provided to you in advance of the next MMAC Board meeting on October 8th, at which EYwill present an overview of our findings, in conjunction with MMAC tax policyrecommendations for the Boards consideration.

Should you have any questions about this information prior to the Board meeting, please do nothesitate to contact me at 414-223-7190.

Yours sincerely,

Keith R. BurnsOffice Managing Partner
http://www.ey.com/http://www.ey.com/


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Analysis of Milwaukees Relative Business Tax Burdens

EXECUTIVE SUMMARY

This report has been prepared by Ernst & Young LLP (EY) for the Metropolitan MilwaukeeAssociation of Commerce (MMAC). MMAC is interested in knowing how Milwaukee comparesto other selected locations in terms of state and local business tax competitiveness. To answerthis important tax policy question, EY completed the following: 1) an inventory of the keystatutory state and local tax features in selected locations in fourteen states, 2) estimates of theeffective tax rates that businesses within four specific industry groups would pay on newinvestments in each location, and 3) estimates of the combined business taxes and employee

individual income and property taxes in each location.1

The analysis in this report provides information on state and local business tax competitivenessin Milwaukee compared to fourteen other locations for four representative industries: industrial

machinery manufacturing, information technology, financial funds management andmanagement offices. The comparison locations and industries were selected by MMAC.

Milwaukees business tax competitiveness depends upon the combined impact of the state andlocal taxes imposed on business, including corporate income and franchise taxes, sales taxes onbusiness inputs, and property taxes. The competitiveness analysis in this study provides asystematic 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 employeesadded 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 taxburdens across the designated locations. The employee tax burdens are combined with thebusiness tax burdens through the use of an index methodology to derive an overall state and localtax burden comparison.

Key Findings from the State and Local Business Tax Inventory

Business Taxes

Businesses operating in Wisconsin paid an estimated $9.7 billion in state and local taxesin fiscal year 2009. Business taxes equaled 41% of all state and local taxes ($23.6

billion) collected in Wisconsin in 2009. Milwaukees business tax competitivenessdepends upon this combined state and local business tax burden.

1See the detailed EY report prepared for the MMAC,Analysis of Milwaukees Relative Business Tax Burdens

(August 2010) for a detailed discussion of the study results and the methodology used to estimate business andemployee tax burdens.


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The property tax is the single largest business tax, accounting for 46.5% of totalWisconsin state and local business taxes. (See Table ES-1.) The sales tax on businessinputs and the corporate income tax accounted for 16.2% and 6.7% of the total,respectively. While the sales tax paid on business input purchases may be less visiblethan property taxes or corporate income taxes, they can have a significant impact on

relative business tax burdens.

As shown in Table ES-1, Wisconsins property tax share is significantly above the U.S.average and the share in the comparison states. The Wisconsin property tax share is27% higher than the U.S. average share while the sales tax share is 25% lower than theaverage for the comparison states.

Table ES-1

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

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

Another distinguishing feature of Wisconsins business tax structure is the relatively low

share accounted for by the sales tax. The share in Wisconsin (16.2%) is 25% below theU.S. average and the third lowest among the comparison states.

One reason for Wisconsins relatively low sales tax share of total business taxes is thelow combined state and local sales tax rate of 5.5%. The combined rate is 22% belowthe average for the comparative locations. This low rate reduces Wisconsins relianceon sales taxes (for both household and business purchases) compared to other states.

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 2.8 100.0North 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


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Wisconsins statutory corporate income tax rate (7.9%) is 5th highest among thecomparison states. The single sales factor apportionment formula reduces effectivecorporate income tax rates for multistate firms with substantial sales outside ofWisconsin.

Relative to all 50 states, Wisconsin is ranked 12th highest in terms of the percentage of abusiness tax increase that is expected to be borne by state residents through lowerspendable income through either higher prices for consumer purchases or lower wagesand salaries. As shown in Table ES-2, the Wisconsin percentage is 80%, tied withFlorida for second highest among the comparison states.

This tax incidence measure indicates that, in the long run, Wisconsin business taxincreases fall primarily on state residents through a combination of higher prices forconsumer purchases and/or lower wages and income. The estimate also means that 80%of a business tax reduction would result in an increase in the real incomes of Wisconsinresidents through higher wages and lower prices. In other words, the benefits of business

tax reductions would accrue to state residents as well as business tax payers.Table ES-2

Economic Incidence of a Proportionate Increase in State and Local Business Taxes,

by State

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

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


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Taxes on Households

Milwaukee imposes relatively high residential property taxes and individual income taxeson employees of businesses.

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

Wisconsin is also unusual in terms of the progressivity of the individual income tax. Asshown in Figure ES-3 Wisconsin and Minnesota are tied for second (behind New York)in terms of the progressivity of the individual income tax. Three of the comparison

states, Tennessee, Texas and Florida, do not have individual income taxes. (Theprogressivity measure compares the ETR for taxpayers in the 80th to 95th incomepercentiles to the ETR of taxpayers in the first decile.)

Figure ES-3

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 in the full report).

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Difference from 80-95th percentile to 0-

20th percentile


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Key Findings from the Business Competitiveness Analysis (Phase 1)

Current Milwaukee business tax burdens are in line with the majority of competitive states(see Table ES-3, Phase 1 following).

The competitiveness analysis compares business tax burdens in Milwaukee and 14 otherlocations using effective tax rates (ETRs). The ETRs measure the percentage reductionin 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 manufacturingis 15.6% below the average for all comparative locations. The relatively low overallETR reflects property tax exemptions for tangible property used in manufacturing, arelatively low property tax rate, significant sales tax exemptions on machinery andequipment purchases, and the favorable impact of single sales factor apportionment forthe corporate income tax.

For the industrial machinery manufacturing example, Milwaukee is ranked 13th.

However, Milwaukees overall ETR is closer to competitor states than suggested by thesimple ranking. Milwaukees overall industrial machinery manufacturing ETR (5.4%)is very close to the average rate (5.5%) for the nine lowest ranked locations. This groupis significantly below the ETRs for the group of six states that have significantly highereffective tax rates (average of 7.8%).

Milwaukee is ranked 14th

in overall ETR for information technology, almost 20% belowthe comparative location average. Milwaukees ETRs for financial funds managementand management offices are also below average. The management offices example is

15.6% below the average for the comparison states, while the financial fundsmanagement example is 14.2% below the average.

The ETR rankings for the other three industries also show that Milwaukees ETRs aresimilar 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 bysignificantly higher tax rates in 4 or 5 states included in the analysis. While lower thanthe top tier states, Milwaukees ETRs are in line with the ETRs for the second tier oflocations.

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 fundsmanagement and 9th

highest for industrial machinery manufacturing.

For manufacturing, statutory credits tend to provide a greater reduction in ETRs for thestates with the highest before-credit ETRs (Charlotte, Detroit, Baltimore, andPittsburgh). Statutory credits provide relatively less tax relief for the other threeindustries. Milwaukees statutory credits are close to the industry averages in theanalysis.


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Table ES-3 Phase 1

Effective Business Tax Rates and Rankings among Comparison States,

by Industry and Location

Industrial Machinery

ManufacturingInformation Technology Financial Funds Management Management Offices

Location ETR Location ETR Location ETR Location ETR

Charlotte, NC 8.4% Baltimore, Maryland 15.9% Baltimore, Maryland 5.9% Nashville, Tennessee 5.3%

Nashville, Tennessee 8.2% Nashville, Tennessee 15.6% Nashville, Tennessee 5.8% Pittsburgh, PA 5.1%Detroit, Michigan 8.1% Charlotte, NC 14.3% Pittsburgh, PA 5.7% Baltimore, Maryland 5.0%

Baltimore, Maryland 7.8% Detroit, Michigan 12.2% Charlotte, NC 5.6% Charlotte, NC 5.0%

Pittsburgh, PA 7.3% Pittsburgh, PA 11.6% Minneapolis, MN 4.8% Minneapolis, MN 3.4%

Minneapolis, Minnesota 6.9% St. Louis, Missouri 11.5% Detroit, Michigan 4.4% Orlando, Florida 3.4%

Kansas City, Missouri 6.0% Minneapolis, MN 11.3% Buffalo, New York 4.3% Buffalo, New York 3.2%

Orlando, Florida 5.8% Chicago, Illinois 11.2% Orlando, Florida 4.1% Chicago, Illinois 2.8%

St. Louis, Missouri 5.7% Buffalo, New York 11.1% Chicago, Illinois 3.7% Milwaukee, WI 2.7%

Indianapolis, Indiana 5.6% Orlando, Florida 10.9% Indianapolis, Indiana 3.6% Indianapolis, Indiana 2.6%

Buffalo, New York 5.6% Kansas City, MO 10.6% Milwaukee, WI 3.6% St. Louis, Missouri 2.5%

Chicago, Illinois 5.6% Indianapolis, Indiana 10.6% Kansas City, Missouri 3.5% Kansas City, Missouri 2.4%

Milwaukee, WI 5.4% Dallas, Texas 10.0% St. Louis, Missouri 3.5% Detroit, Michigan 2.3%

Dallas, Texas 5.2% Milwaukee, WI 9.4% Cleveland, Ohio 2.6% Cleveland, Ohio 1.3%

Cleveland, Ohio 4.8% Cleveland, Ohio 9.1% 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%


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Key Findings from the Combined Business and Employee Tax Burden Analysis (Phase 2)

Combining the business and employee tax burdens, Milwaukee emerges as one of the least

competitive locations for the machinery manufacturing and information technologyindustries (see Table ES-4, Phase 2 following).

Milwaukee imposes relatively high individual income and residential property taxescompared to the other locations. In combination with relatively high industry wages, thenew employees added in the business expansions pay relatively high income andproperty taxes in Milwaukee. As a result, Milwaukee business employers may have topay employees higher wages to offset these higher personal tax burdens.

Table ES-4 utilizes an index methodology for measuring Milwaukees combined taxburden compared to the other locations. For each location, the index number compares

the combined burden of a specific location relative to the lowest tax location for eachindustry (assigned an index of 1.0).

Milwaukee ranks 3rd highest for machinery manufacturing, just behind Buffalo and

Detroit. For this industry, combined business and household taxes are over three timeshigher in Milwaukee compared to lowest-tax location, Nashville. For the informationtechnology industry, Milwaukee is tied with Baltimore as the highest taxed location.

Milwaukee ranks 7thhighest for combined business and employee taxes for the financial

funds management industry. For the management offices group, Milwaukees rank is9thhighest. The difference in rankings between business taxes and combined business

and employee taxes is less for these two industries because the expansions add feweremployees with lower wages.


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Table ES-4 Phase 2

Index of Combined Business and Personal Tax Burdens and Rankings among Comparison States,

by Industry and Location

Industrial Machinery

ManufacturingInformation Technology Financial Funds Management Management Offices

Location Index Location Index Location Index Location Index

Buffalo, New York 3.21 Baltimore, Maryland 1.96 Baltimore, Maryland 4.07 Nashville, Tennessee 7.92

Detroit, Michigan 3.21 Milwaukee, Wisconsin 1.95 Chicago, Illinois 2.93 Pittsburgh, PA 7.77Milwaukee, Wisconsin 3.13 Buffalo, New York 1.87 Pittsburgh, PA 2.78 Baltimore, Maryland 7.72

Minneapolis, Minnesota 2.69 Charlotte, NC 1.84 Minneapolis, Minnesota 2.74 Charlotte, NC 7.69

Charlotte, NC 2.45 Minneapolis, Minnesota 1.74 Charlotte, NC 2.67 Minneapolis, Minnesota 5.36

Cleveland, Ohio 1.99 Chicago, Illinois 1.70 Buffalo, New York 2.35 Orlando, Florida 5.16

St. Louis, Missouri 1.91 Detroit, Michigan 1.51 Milwaukee, Wisconsin 2.30 Buffalo, New York 4.87

Baltimore, Maryland 1.89 Pittsburgh, PA 1.39 Detroit, Michigan 2.13 Chicago, Illinois 4.43

Chicago, Illinois 1.84 St. Louis, Missouri 1.38 Nashville, Tennessee 2.03 Milwaukee, Wisconsin 4.30

Pittsburgh, PA 1.61 Cleveland, Ohio 1.35 Cleveland, Ohio 1.79 Indianapolis, Indiana 3.99

Kansas City, Missouri 1.47 Kansas City, Missouri 1.35 St. Louis, Missouri 1.76 St. Louis, Missouri 3.82

Indianapolis, Indiana 1.46 Indianapolis, Indiana 1.29 Indianapolis, Indiana 1.67 Kansas City, Missouri 3.81

Orlando, Florida 1.13 Orlando, Florida 1.18 Kansas City, Missouri 1.66 Detroit, Michigan 3.71

Dallas, Texas 1.01 Nashville, Tennessee 1.15 Orlando, Florida 1.59 Cleveland, Ohio 2.20

Nashville, Tennessee 1.00 Dallas, Texas 1.00 Dallas, Texas 1.00 Dallas, Texas 1.00

15-Location Average 6.4% 15-Location Average 11.7% 15-Location Average 4.2% 15-Location Average 3.2%


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Observations and Policy Implications

It is important to determine which states Wisconsin is competing with for new jobs andcapital investments. As noted, Wisconsins ETRs are much closer to those in the secondtier (ranked by ETRs) of competitor states included in this study. The figures show that

the average ETRs for all comparative locations are being pulled up by four high-taxlocations (Charlotte, Nashville, Detroit and Baltimore). For the other locations,Milwaukee does not have a significant advantage in terms of state and local business taxburdens. While the research would indicate that the business tax environment is not asdifficult as the perception of that environment, it also indicates that Wisconsin does nothave a compelling competitive advantage compared to other selected locations. To bemore competitive with the second tier states, Wisconsin would have to reduce overallbusiness tax burdens.

Wisconsin is most competitive in terms of state and local business tax burdens onindustrial 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 thelargest share of the business tax burden. For industrial machinery manufacturing,unemployment taxes account for the largest percentage of business taxes. Becausedifferent tax types account for different shares of the combined state and local taxburdens for the selected industries, business tax reform in Wisconsin will likely involve apackage of changes affecting multiple business taxes.

Wisconsins tax competitiveness is determined by more than just state and local businesstaxes paid directly by businesses operating in the state. Residential property taxes andindividual income taxes also affect tax competitiveness indirectly. This occurs if

business has to pay relatively higher wages to employees to offset Wisconsins relativelyhigh property taxes on homes and income taxes on earnings. It also has an impact bybeing perhaps the major contributor to the perception of Wisconsin as a difficult taxenvironment. Any discussion of improving Wisconsins tax competitiveness needs toaddress simultaneously business taxes, property taxes on residential property andWisconsins individual income tax.

The State of Wisconsin will be electing a new governor this November. There is also areal possibility of significant changes in the legislature. These elected officials willcollectively be facing a structural budget deficit that has been placed somewhere between$2.2 and $2.6 billion by a number of news and non-partisan organizations. Difficult

decisions will need to be made by these elected officials to meet the constitutionalrequirement for a balanced budget.


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Because the research indicates that the comparative business tax burden is notsignificantly out of line with these peer locations there is some risk that electedofficials will select some manner of business tax increases as a way to close thisstructural budget deficit issue. This risk will likely be enhanced as a number of state andlocal governments are likely to also evaluate tax increases of varying degrees after the

election is concluded.

In such an environment, business tax reform might initially take a more targeted form toaddress those areas of Wisconsin tax policy that are either not aligned with federal taxpolicy or that are fairness issues. Those areas would include:

o Implementation of combined reporting transition ruleso Conformity with IRC Section 199 manufacturing credito Adoption or expansion of targeted business credits for new employment

With personal tax issues relating to residential property taxes and personal income taxesrepresenting both the larger portion of the overall tax burden and contributing to the tax

competitiveness perception, near term personal tax relief would also represent a viablepath to address the comparative tax competitiveness. As noted, this could also contributeto the business competitiveness by making it easier to attract employees at perhaps lowereconomic cost.

Ernst and Young Tax Burden Study Exec Summary

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