Stingers: The 2004 State Tax Survey

Tough times can make for tense relations between corporate tax executives and state tax authorities. Our survey suggests that even if economic conditions improve, the stage is set for more contentiousness than ever.

We asked the 81 percent of survey respondents who said tax hikes were inevitable in the state where they work which taxes they’d like to see raised. Many, apparently, are nonsmoking teetotalers, because sin taxes on cigarettes and alcohol were an overwhelmingly popular first choice (41.5 percent). Unfortunately, Lippman notes that most states “already did the easy things” like raising sin taxes. Consumer sales taxes were a strong second among our respondents (35.4 percent), followed by an even split on individual and corporate income tax (16.2 percent each). “With states having exhausted the easy remedies—delaying payment into a pension fund or increasing fees and cigarette taxes—it will be tougher and tougher for them to close the deficit with anything other than a tax increase,” says COST’s Lindholm

Although some states have already raised taxes—New York, for example, has raised both sales and income taxes—expect a wave of increases after this year’s election season. In the meantime, our survey suggests, corporations are going to have to live with tougher tax administration from states seeking to close their budget gaps. “States are out of money, and they are getting money out of audits even when the bases of their arguments are unreasonable, unfounded, and stupid,” wrote one survey respondent. “The tax department is then left with the option of fighting them or giving in.”

Tim Reason is a senior writer at CFO.

The 2004 Survey Results

This is the fourth time since 1996 that CFO magazine has surveyed corporate tax officials on their impressions of state tax environments. Given looming state deficits, we added questions this year about whether companies expected increased taxes, aggressive clawbacks, or legislation that would withdraw existing business incentives. States that received the worst ranking appear in boxes throughout the text.

An important characteristic of our survey is that it measures opinion, rather than comparing objective measures such as tax rates or appeal deadlines. After our last survey, in 2000, tax officials from some states, including Massachusetts, told us they were disappointed to get no recognition for big improvements in their administrative environment.

Without a doubt, impressions of unfair treatment die hard. States that topped our lists three years ago as most aggressive or least fair are often there again, even though we cast a much wider net this year, sending surveys to some 5,500 corporate tax officials, with the help of KPMG. We received 130 responses, a 2.3 percent response rate. But the results also reflected significant changes to the tax environment—most notably, New Jersey’s precipitous drop in the eyes of corporate taxpayers.

Bad Boys

Were it not for New Jersey crashing the list of the worst five states, little would have changed from previous surveys—the states that corporate tax officials love to hate remain fairly consistent. This year, we simplified our maps to highlight the states that really stand out. The states marked the least (or most) fair and predictable are those whose survey scores deviated from the average by more than one standard deviation.


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