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Shaking the Game Board: Will the New U.S. Tax Law Impact Location Decisions?

30 Apr, 2018

By: Christopher Steele

Of all of the discussions in Washington D.C., in the past year, few have actually developed into policy in ways that will affect corporate investment decisions. Foremost among these is the new U.S. tax law, which has reduced corporate taxes at a national level. This change may make the U.S. a more favorable tax regime overall, but may also have other, less-obvious impacts on corporate location decisions within the United States.

The effects of the new tax law on corporate deductions, personal deductions and the interplay of state-level tax benefits and federal taxes could each shift the balance of attractiveness of tax regimes among the 50 states.  

Of particular interest to corporations is the treatment of if, and to what degree, state income taxes may be deducted at the state level. Such a change, of course, affects companies that are either located in or were considering locating in higher state corporate tax locations (such as New Jersey, California and New York, among others). In effect, companies will now feel more of the full impact of these higher state taxes. It will be up to the companies themselves to determine whether or not the other apparent advantages of locating in these states will offset the additional cost liability.  

The new tax bill also significantly changes personal income taxes, though the nature of those changes will evolve over the next few years. While brackets have been simplified and reduced in number, the same factor regarding deduction of state income taxes comes into play. Put simply, individuals for whom the deduction of high state income taxes from a federal return is a material consideration may choose to re-examine their state of residency. Such increased tax liability is important as it may tend to keep away high-income decision makers and owners of either S-Corp or LLC corporations. In fact, higher income individuals across the board will also likely be taking these factors into account when choosing where to live. This becomes a complicating element for companies engaged in the global war for talent. Currently, some of the global talent clusters are located in some of the higher tax states, but could the new U.S. tax treatment cause those clusters to disperse?

Last, there has been some discussion on if and how tax subsidies – tax credits and other corporate location incentives received from state and local entities – will be treated as income for federal tax purposes. No one is yet certain of the eventual fallout if these heretofore disregarded subsidies have to be reported and then taxed at the federal level. The Government Accounting Standards Board statement 77 (which went into effect December 2015) has already mandated that such tax abatement be reported, increasing transparency into some forms of incentives. However, the possibility that incentives such as these could create federal tax liability may now further alter the overall effectiveness of such deals, especially in state vs. state competitions.

These are still early days in examining the tax bill and its lasting impacts. It remains to be seen if and to what degree companies will directly feel these impacts in such a way that they will sway location decisions more than other key factors. Access to talent, business networks, logistics, infrastructure and other key business drivers will still be the prime drivers in location decisions. Nonetheless, the 2017 tax bill shakes the game board just enough that some decisions might go in directions that they would not have before the law was passed. T&ID

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