EXPERT AVAILABLE: State Tax Rates Not Only Comparison of Attractiveness for New Business, MU Expert Says
June 3rd, 2013
The views and opinions expressed in this “for expert comment” release are based on research and/or opinions of the researcher(s) and/or faculty member(s) and do not reflect the University’s official stance.
COLUMBIA, Mo. — State governments around the country are interested in increasing economic development and decreasing unemployment rates, particularly in times of economic downturn. Policy makers frequently include taxes in discussions regarding strategies to improve a state’s competitive position to attract new businesses. Judith Stallmann, a professor in the Truman School of Public Affairs at the University of Missouri and an economic policy analyst, advises policy makers to take a more comprehensive view of taxes when evaluating policies among states, as opposed to simply comparing tax rates.
“The taxes a firm pays depend not only on the tax rate, but also on incentives, such as property tax breaks, and the way the tax base, or what is being taxed, is defined,” said Stallmann, who also is a professor of community development extension, agricultural and applied economics, and rural sociology in the College of Agriculture, Food, and Natural Resources. “These factors have a lot of variation across the states. Because of this, no single measuring device can provide a comprehensive understanding of a state’s tax system. This is why it is important for policy makers to use several different metrics to create a more accurate understanding of how states compare with each other before they enact taxation policy based on incomplete information.”
Stallmann analyzed five different taxation studies comparing and ranking effective tax rates of nine Midwestern states (Missouri and its neighbors.) She found that the rankings of some states varied significantly due to the differing analyses used in each study, while rankings for other states were more consistent. For example, while Missouri generally ranked in the lower half of effective tax rates among regional states, it ranked as having the lowest effective tax rate among regional states in a study of business taxes as a percentage of private gross state product and third highest effective rate out of nine states in another study that only considered particular types of firms.
“This is just one example of how dramatically differently tax rates can be evaluated depending on who is conducting the evaluation,” Stallmann said. “Tax rates cannot be compared apples-to-apples. It is important to take into consideration the existing tax bases as well as pre-existing incentives, which vary from state to state, and combine that information with simple tax rates to achieve a more comprehensive and accurate picture.”
Stallmann also says simply reducing tax rates will not necessarily make a state more competitive in attracting new businesses. She says businesses take many factors beyond tax rates into account when evaluating the competitiveness of states. These factors may include expenditures on public services, labor costs, transportation and the quality and quantity of infrastructure.
Stallmann’s report is published on the website of the MU Institute of Public Policy and was distributed to Missouri legislators. To view a full copy of her report, visit: http://ipp.missouri.edu/files/ipp/attachments/07-2013_comparing_taxes_in_missouri_and_surrounding_states_0.pdf