The right tax climate is the right way to seed growth

Dec 01, 2008 | 08:26 AM |

State legislators, aware of their states' business tax climates, are frequently tempted to woo business with lucrative tax incentives and subsidies instead of broad-based tax reform, which can be a "dangerous proposition," according to Joshua Barro, staff economist at the Washington-based Tax Foundation.

In a research paper on the 2009 State Business Tax Climate Index, released in October, Barro points to Florida, whose lawmakers were angered in 2004 when a credit card issuer decided to close a call center—laying off more than 1,100 employees—after receiving $3 million in state tax breaks over the previous nine years.

Lawmakers offer such deals to create jobs and develop the economy, but "if a state needs to offer such packages it is most likely covering for a woeful business tax climate," he said. A far more effective approach "is to systematically improve the business tax climate for the long term so as to improve the state's competitiveness."

Business taxes affect business decisions, job creation and retention, plant location, competitiveness, the transparency of the tax system and the long-term health of a state's economy. Most importantly, "taxes diminish profits," Barro said. "If taxes take a larger portion of profits, that cost is passed along to consumers through higher prices; (to) workers through lower wages or fewer jobs; or shareholders through lower dividends or share value."....