The Texas tax break is all about people, not company taxes

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The Texas tax break is all about individuals, not corporate taxes

High-profile business moves from California to Texas are likely to improve executive personal finances and provide more affordable housing for employees – but have little impact on corporate tax burdens.

The announcements highlighted the vastly different tax and regulatory systems in the two most populous states in the country. California is more reliant on personal income taxation, especially for high-income households, and has a growing regulatory structure. Texas relies on more regressive real estate and sales taxes and offers a laissez-faire environment. Biggest Difference: Highly paid executives who move can see their state income tax bills go from 13.3% to zero.

But corporate investors hoping for high taxes and other savings may need to ease their enthusiasm. Trade tax considerations are likely to prove to be secondary at best, say experts in tax and economic development. They are dwarfed by the appeal of affordable housing, lower cost of living, and lower regulatory burdens.

For businesses, much of the difference between California and Texas is due to the ease and cost of hiring – not just now, but later.

Oracle may not be moving many jobs to Texas, despite the fact that the software maker has cited workplace flexibility for changing addresses.


Photo:

John G. Mabanglo / EPA / Shutterstock

“A lot of this is honestly just long-term labor availability,” said King White, managing director of Site Selection Group, a consultancy that helps companies decide where to open or relocate facilities.

Businesses are also frustrated with the cost of attracting and retaining employees as the cost of living increases and regulatory mandates increase, particularly in Northern California. “The impact of California’s economic and political environment makes it difficult to run a business effectively,” said White.

Oracle may not move many jobs even though the software manufacturer has indicated the flexibility in the workplace for changing addresses. HPE already has a lot of activity in Texas. The server computer maker said it was on its way to finding diverse talent and long term savings. Adam Bauer, an HPE spokesperson, said the move was not tax related and there would be no corporate tax benefit.

“It’s not always clear that Texas is a winner compared to California,” said Matt Hunsaker, a state tax attorney at Baker & Hostetler LLP who works in both states but didn’t discuss specific companies.

“There are no worlds for corporate taxes.” he said. “But they can be worlds apart [individual] Income taxes and often this is important to the company to manage labor costs and keep employees happy. “

The Tax Foundation, a conservatively oriented Washington group, ranks 49th in the ranking of state business tax climate zones, 11th in Texas. This is largely a function of individual taxes, some of which are on business income. The California group ranks ahead of Texas for corporate and property taxes.

According to the Council on State Taxation, a group of companies, Texas charges 5% of its private economy in business taxes, ahead of the national average of 4.5% and 4.3% in California.

In the past, companies have paid much more attention to federal taxes than to state taxes. After the U.S. cut the federal corporate income tax rate from 35% to 21% in 2017, state corporate taxes became a more important cost to businesses.

“Oracle’s departure only brings the point home,” said Jared Walczak, vice president of government projects at the Tax Foundation. “It has never been easier for individuals and businesses to relocate to avoid high taxes and other costs.”

Changing addresses or even moving people and facilities doesn’t necessarily change a company’s tax costs.

Both California and Texas generally determine a company’s tax base in their state by examining what proportion of their sales are made in the state. It is therefore unlikely that moving employees without changing where they sell products and services will do much to change a company’s debt. California corporation tax has a maximum rate of 8.84%. The Texas franchise tax has a much broader base and a maximum rate of 0.75%.

During WSJ’s CEO Council, Tesla CEO Elon Musk explained his reasons for leaving California and criticized the state for being natural for innovators. Photo: Hannibal Hanschke / Reuters

The bigger factor – which outweighs any change in corporate taxes – is likely to be the lower cost of employing workers in the state. For most people, this calculation is more about housing costs, said Darien Shanske, professor of tax law at the University of California at Davis. Housing shortages and land use regulations are bigger drivers of wage costs than taxes.

“Moving a headquarters to Austin where people can buy a place to live dominates for most people whether or not they pay income tax,” Shanske said. “If a few centimillionaires decide to move to Texas, it seems less interesting to me than an entire upper middle class who feels they are being influenced by property prices” in California.

At a time when remote working has suddenly become the norm in many industries and professions, companies can often take advantage of the differences in the cost of living without having to move. Highly paid executives can move to a tax-exempt state even if the company doesn’t, for example. The moves have an even bigger tax break than they used to be, as the state and local tax deduction on federal taxable income is capped at $ 10,000.

Company founders who want to minimize state taxes when selling shares do not have to live where their headquarters are located. You can move away from California no matter where the office is before the sale. Oracle founder and chairman Larry Ellison announced to employees this week that he has moved his primary residence to his island retreat in Hawaii, a state with individual income taxes.

Critics of California politics say that local taxes are sometimes used to influence corporate behavior. A San Francisco election approved last month will tax companies higher if their executives are paid too much more than front-line workers.

“Some of these taxes may not be particularly burdensome, but they are supposed to drive corporate policy, which I think is problematic for companies,” said tax attorney Hunsaker. “Most companies – when they think about moving – might think about taxes, but there is usually something else that drives them.”

Write to Richard Rubin at richard.rubin@wsj.com and Theo Francis at theo.francis@wsj.com

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