WASHINGTON—Studies suggest that high taxes put corporations at a competitive disadvantage not only in the global markets, but also within different states in the United States.
Companies have historically moved operations from U.S. states with high taxes to those with low corporate and personal taxes, says the Tax Foundation, a non-partisan tax research firm based in Washington, D.C. It recently published its “2008 State Business Tax Climate Index” white paper.
A vibrant business environment depends on “how friendly, or unfriendly each state government is towards free enterprise and consumer choice,” suggests the Pacific Research Institute (PRI), a conservative think tank based in California, in its recently released “U.S. Economic Freedom Index: 2008 Report.”
When companies abandon ship and take up home in another state, “The bomb is [triggered by] high taxes,” concurs the American Legislative Change Council (ALEC) in its report “Rich States Poor States.”
Business Climate Findings
“The big winners in this interstate competition for jobs and growth have generally been the Southern states and those in the Southwest region of the country… the big losers have been the traditional rustbelt regions of the Northeast and Midwest,” argues ALEC in its report.
South Dakota was ranked by several indexes—a benchmark against which companies can measure their performance—as to having the most business-friendly environment. South Dakota does not tax corporate capital gains, which reduces profits earned on investments and entrepreneurship.
PRI scored South Dakota, Idaho and Colorado as having the most business-friendly environments when it comes to taxation, while it found New York the worst, with Pennsylvania, California, New Jersey, and Rhode Island not too far behind.
“South Dakota has no corporate income tax, no personal income tax, no personal property tax, no business inventory tax and no inheritance tax,” according to the PRI study.
The Ideal System
“States that cut their marginal tax rates, enact right-to-work legislation and limit frivolous jury awards see an influx of capital, people and businesses,” suggested PRI.
“The ideal tax system—whether at the local state or federal level—is simple, transparent, stable, neutral to business activity and pro-growth,” advocates the Tax Foundation.
Lucrative business tax incentives are not the best strategy to lure business to the state, the Tax Foundation argued.
“Lawmakers create these deals under the banner of job creation and economic development, but the truth is that if a state needs to offer such packages, it is most likely covering for a woeful business climate,” said the Tax Foundation.
“While taxes are a fact of life, not all tax systems are created equal. States should strive to create tax systems that have a broad base and a low rate,” the Foundation said. “Ultimately, that means that states must strive for tax systems that are economically neutral—systems that do not favor one economic activity over another—and systems that promote economic growth.”
The U.S. corporate income tax rate is currently pegged to 40 percent, which is 14.1 percent higher than the global average and 16.8 percent higher than the tax rate in the European Union, according to a recently released study by KPMG LLP.
The United Arab Emirates, Kuwait and Japan imposed higher corporate taxes than the United States did in 2008.
The U.S. increased its tax rate from 24 percent four years ago. In contrast, Germany decreased its business tax by 8.9 percent in 2008.
“The U.S. rate was higher than all other global regions in 1999 and the difference is even more dramatic today,” said Scott Hodge, president of the Tax Foundation, in a press release detailing the KPMG study. “If [Germans] now recognize that taxes matter to a country’s business climate and incentives to work, then when will America’s political class?”