- Basics
The business share of the local, state, and federal tax burden has fallen steadily in the last generation. And yet the hue and cry for cutting business taxes (on income or property) or offering lavish tax credits* is louder now than it has ever been. Part of this reflects the pressure on states and localities to offer an amenable “business climate,” or the “most competitive” tax and regulatory environment—an anxiety only heightened by the recession. And part of this reflects a willful misunderstanding as to the impact of such policies which—as the research decisively shows—are remarkably ineffective and inefficient as a tool for attracting new investment.
*Business tax credits (economic development subsidies that reduce a company's taxes by allowing it to deduct all or part of certain expenses from its income tax bill) are usually granted to promote a particular goal or economic activity (job creation, research and development, investment). Under some state and federal programs, these credits are refundable—meaning they will generate direct payments to firms which manage to reduce their tax liability to zero but still qualify for a credit.
- Current Landscape
The recession has spurred a largely opportunistic (and even cynical) push for lower business taxes and new tax credits. These efforts are too diffuse and diverse to summarize here. For recent developments in tax policy, consult the state reports collected by the Institute on Taxation and Economic Policy. An excellent state-by-state accounting of business subsidies is the “click on your state” Accountable USA map at Good Jobs First. One of the more egregious initiatives—given their dismal accountability—is the push to privatize state economic development departments.
- FAQ
Do low business taxes or generous subsidies attract new investment?
Proponents of business tax breaks claim that taxes are a significant factor in the location choices of businesses and that a state can tax-cut its way to economic growth and generate tax revenue in the process. There are good reasons to be skeptical of such a claim, and several decades of research on the relation between state taxes and growth confirm that such claims are vastly overblown and sometimes completely misleading. Business tax breaks turn out to be an expensive and inefficient way to attempt to stimulate a state economy—in large part because they often rob public treasuries of the resources needed fund the things (good schools, infrastructure) that actually do attract business.
How high are business taxes?
This, of course, varies across states—but the answer should almost always be governed by a couple of caveats. First, state-to-state variation in the business tax burden is slight, and even at its heaviest constitutes a small share of either state revenues or business costs. Second, anti-tax groups tend to cite the tax rate, which is a poor index of what business interests (who enjoy numerous tax breaks and subsidies) actually pay.
- Learn More
The best source for developments in state tax policy, including business taxes, is the Institute on Taxation and Economic Policy. Also useful are the state budget and tax portal of the Center for Budget and Policy Priorities, and Tax Policy Center (the latter mostly for federal tax issues). The go-to source for state level work on business subsidies is Good Jobs First. Its 2011 report Public-Private Power Grab dissects the efforts to privatize economic development. WalmartSubsidyWatch offers a detailed look at the deals for the nation’s largest (and much-subsidized) retailer.
