State Taxes and Business Migration

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.:

o 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.

o 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.

o 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.

o The Tax Foundation points out that taxes on individuals
are often taxes on individual business owners
(sole proprietorships), which employ 30 million people.

o "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.

For NYT text (subscription required)

For more on Lynch study
http://www.epinet.org/cgi-bin/shop/shop.cgi

For Tax Foundation study
http://taxfoundation.org/bp41.pdf

For more on State and Local Taxes
http://www.ncpa.org/iss/tax/