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
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."
This means a state with lower overall tax costs will be more
attractive to business investment and more likely to experience
economic growth. The ideal tax system-local, state or
federal-is simple, transparent, stable, neutral to business
activity and pro-growth, he said.
The Tax Foundation lists Wyoming, South Dakota, Nevada,
Alaska, Florida, Montana, Texas, New Hampshire, Oregon and
Delaware as the 10 states with the best business tax climates;
Minnesota, Nebraska, Vermont, Iowa, Maryland, Rhode Island,
Ohio, California, New York and New Jersey are said to be the 10
states with the worst business tax climates.
A study by a Massachusetts institute largely agrees with the
Tax Foundation's findings, saying that reforms in that state
would create transparency, eliminate loopholes and create
long-term equity while increasing business investment and
"Massachusetts business tax laws are a hodgepodge of poorly
conceived measures that violate the most fundamental principles
of tax equity. They discourage business from locating in the
Commonwealth and serve alternately as a target for
revenue-hungry state government and a mechanism for dispensing
largess to special pleaders," said an April 2008 reform
proposal study by the Beacon Hill Institute at Suffolk
The study laid out a proposal for comprehensive business tax
reform that is fair, revenue neutral and that would have a
positive effect on economic growth. The institute proposed
business tax reforms that would broaden the base by eliminating
credits and loopholes and lower the rate for almost all
business entities to 5.3 percent. Using a modeling program
created by the institute, the study's authors project the state
would lose about $86 million in the first year of
implementation, or about 0.4 percent of current revenue, but
there would be an immediate (but small) first-year gain in
local tax revenue.
"This minuscule loss in revenue is a small-enough price to
pay in order to achieve equity in the taxation of business and
to turn the state tax code into an engine for attracting,
rather than repelling, business," the study said.
In addition, the state's reformed tax system would allow
businesses to create more than 4,000 new private-sector jobs in
the first year. Subsequently, business investment could
increase by nearly $120 million annually.
Barring reform, the institute concluded, companies would
"continue to engage in tax-avoidance strategies as long as
(overall tax) rates remain high."
A 2005 study of the Michigan Economic Growth Authority
(MEGA), the state's primary tax-incentive program, completed by
the Mackinac Center for Public Policy, was so highly critical
of MEGA that it recommended ending the program altogether.
The Midland, Mich.-based institute center assessed the
history of the program, which is Michigan's agent for selecting
companies to receive single business tax credits in return for
creating new facilities and jobs. Through 2004, more than $1.8
billion in tax relief was offered to more than 200 companies
through 230 agreements valued at more than $3 billion when
including other state and local incentives, such as property
tax abatements, job training subsidies and infrastructure
Of 56 agreements meant specifically to create jobs, only 10
were shown to have created the number of direct jobs originally
projected within the expected time frame, the Mackinac Center
study found. And for 127 agreements measured, only 38 percent
met original job-creation expectations. Thus, the study's
authors said, MEGA's estimates of job creation "were
Further, the study said that MEGA "did not improve" the
state's or the counties' per-capita personal income, employment
or unemployment rate; counties that didn't host companies
receiving MEGA deals fared as well as counties that did; it
didn't affect aggregate income or employment in manufacturing
and warehousing (industries targeted by the program); and
caused a temporary shift to higher construction employment
without increasing overall employment.
The Mackinac Center proposed that, "given the
underperformance of MEGA projects, the program's manifest lack
of economic impact in its first seven years and the inherent
difficulties in making such a program work, it would probably
be best to cancel the MEGA program." It said the state has
alternative tools to improve its business climate that are more
likely to be effective.
The Michigan Economic Growth Authority remains in place.