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Sunday, May 30, 2004

Economic Development - Impact of state and local taxes on business siting

An article today in the NY times reports that:

[A] study released this spring by the Economic Policy Institute, a nonprofit research group based in Washington, says that state and local taxes do not matter all that much to corporations. "The vast majority of the studies find that there is little or no effect of state taxes on where firms invest, and little economic effect in terms of job creation," said the study's author, Robert G. Lynch, an associate professor of economics at Washington College in Chestertown, Md.

State and local taxes paid directly by businesses - corporate income taxes, sales taxes on equipment, property taxes - account for 30 percent of all state and local taxes paid. But in 2000, Dr. Lynch concluded, these taxes were just 1.2 percent of total operating costs for companies. Because companies deduct the payments from their federal tax liability, state and local taxes eat up only 0.8 percent of total costs, or 80 cents of every $100 - hardly enough to mean the difference between profit and loss.

Here is a link to that March 2004 Economic Policy Institute study, titled "Rethinking Growth Strategies: How State and Local Taxes and Services Affect Economic Development."

However, today's NY Times article continues:

But the study may not be taking a wide-enough view of what constitutes a tax on business. In May 2003, the Tax Foundation, a policy group in Washington that advocates lower taxes, ranked the business tax climate in each state. The rankings took into account the taxes paid directly by business, as well as sales taxes, a state's fiscal balance and individual income taxes. The tax on individuals can sometimes function as a tax on business because so many businesses file income tax returns through their individual owners. "There are more sole proprietorships than there are C-corporations," said Scott Moody, a senior economist at the foundation, referring to the form of corporate organization favored by large enterprises. "And they employ 30 million people."

State income taxes can serve as an indirect tax on corporations. Consider two companies - separated by a state border - that produce roughly the same products and pay roughly the same for raw materials, interest and labor. "When taxes rise in one of the states, companies based there have to swallow the higher costs and become less profitable," said Dr. Arthur B. Laffer, chairman of Laffer Associates, an economic research and consulting firm, and an economic adviser to the Reagan administration.

The Tax Foundation website contains a wealth of material. This is the link to the State Finance page. Scroll down the page to see "Changes in State Tax Rates During 2003." Particularly interesting to me was the section about Individual Income Taxes. Montana, for instance, has ten brackets, "including the top bracket, the threshold of which went from $76,200 to $77,800. The rate on that income is still 11 percent." But I'm getting off-track. Here is the link to the State Business Tax Climate Index referred to in the NY Times article, that shows each state's tax system ranked according to how conducive it is to business growth.

Finally, and this is off-tract again, but interesting, take a look at this Tax Foundation table titled Various State Tax Rates. The you can see facts such as Indiana's gas tax ($0.18) vs. Illinois' ($0.30), and Indiana's cigarette tax ($0.555) vs. Illinois' ($0.98) vs. Kentucky's ($0.03).

Posted by Marcia Oddi on May 30, 2004 01:07 PM
Posted to Indiana economic development