NCPA - National Center for Policy Analysis


June 3, 2004

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. However, these taxes have little or no effect on where firms invest or how many jobs they create, claims a study from the Economic Policy Institute (EPI). State and local taxes are only one reason among many that businesses and people relocate. According to Robert G. Lynch, an associate professor of economics at Washington College in Chestertown, Md.:

  • Because companies deduct state and local tax payments from their federal tax liability, state and local taxes make up only 0.8 percent of total costs, or 80 cents out of every $100, hardly enough to mean the difference between profit and loss.
  • South Dakota had the sixth-most-favorable tax climate last year, while neighboring Minnesota was 42nd; however, no major corporations have left Minnesota for South Dakota, and the former outperforms the latter in nearly every economic measure.
  • Ohio (ranked 47th) is not losing manufacturing jobs to Colorado (ranked 4th) but to lower-cost countries like China.

However, the study may not be taking a wide-enough view of what constitutes a tax on business. For example, the Tax Foundation's ranking of the business tax climate in each state takes into account the taxes paid directly by business, as well as sales taxes, a state's fiscal balance and individual income taxes.

  • The Tax Foundation points out that taxes on individuals are often taxes on individual business owners (sole proprietorships), which employ 30 million people.
  • "If any state imposes a greater overall tax burden than a neighboring state, business will cross the border to some extent," the Tax Foundation report says.

"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 and an economic adviser to the Reagan administration. Source: Daniel Gross, "The State-Tax Tug of War," New York Times, May 30, 2004; see also Robert Lynch, "Rethinking Growth Strategies : How State and Local Taxes and Services Affect Economic Development," Economic Policy Institute, March 2004, and Scott A. Hodge, J. Scott Moody and Wendy P. Warcholik, "Stae Business Tax Climate Index," Backgrounder No. 41, May 2003.


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