Much was made of the recent Ernst & Young/Council on State Taxation (COST) study showing Maine’s tax code pertaining to C-corporations was the best in the country.  However, as I pointed out, being limited only to C-corporations was a major limitation in the study in fully understanding Maine’s business tax climate.

Fortunately, Ernst & Young/COST just released their annual study on “Total State and Local Business Taxes” (pdf) which provides a more comprehensive look at the business tax climate.  This  study does not bring good news.  As shown in the chart below, Maine’s state and local tax burden on businesses as a percent of private sector Gross State Product, for Fiscal Year 2010, was 6.8 percent–the 5th highest in the country.

However, Maine’s ranking is actually worse than that considering 3 of the top 5 states depend heavily on severance taxes on natural resources (Alaska, North Dakota and Wyoming).  Excluding those three states would mean that Maine ranks as the 2nd highest state and local tax burden on businesses in the country.

Maine’s tax burden on businesses is also 55 percent higher than New Hampshire’s (6.8 percent versus 4.4 percent).  More troubling is that the two states appear to be heading in the opposite direction. Table 6 on page 11 of the study shows that between FY 2007 and FY 2010, Maine’s business tax burden has increased by approximately $300 million.  Property taxes account for all of the increase jumping by 20 percent.

On the other hand, New Hampshire’s business tax burden has fallen by $400 million.  Property taxes accounted for nearly all of the decrease falling by 19 percent.

The good news is that this study does not yet take into account the $150 million tax cut that was recently enacted.  This will help lower Maine’s tax burden on businesses.  The drop in the top marginal income tax rate to 7.95 from 8.5 percent will help the tens of thousands of businesses in Maine that file through the individual income tax code.  Also very important is the conformity to the federal tax code such as the Section 179 expensing.

We’ll have to wait and see how Maine does next year.  The state tax cuts might help bump West Virginia, but catching Florida will probably take another round of tax cuts.  Also, the growth in the business tax burden has been at the local level, via property taxes, so we don’t know if that will offset the lower state tax burden.

Chart Showing Maine's S&L Business Tax Burden in Fiscal Year 2011