The States and Taxes

Ray Keating

April 15, Tax Day, concentrates the mind on how much the government drains from both our family budgets and the bottom lines of our businesses.

It is not a day for celebration. Instead, it serves as a national day to recognize how outrageous the tax burden is in our country, and how profligate government is.

Even given this reality, however, the current tax take is not enough for many politicians. At the federal level, for example, President Barack Obama would like to increase assorted taxes on higher income earners, including personal income, capital gains, divident and death taxes. Of course, these tax increases will disproportionately hit entrepreneurs and investors, and that's not a good thing if we want to get our economy back on a path of solid economic growth and job creation. For good measure, the unprecedented spending spree undertaken by the President and Congress raise the specter of still more tax increases down the road.

But politicians imposing weighty tax burdens and looking for still more revenues do not stop at the federal government. Lawmakers in states localities across the nation have spent wastefully for many years, and now with a recession translating into less revenue than politicians want, tax increases are on the agenda in many states.

For example, New York just passed a massive package of tax increases that included hikes in the top income tax rates. California also imposed a big tax increase, as did Maryland last year. Other states considering tax increases include Arizona, Connecticut, Delaware, Florida, Illinois, Massachusetts, Minnesota, Mississippi, New Jersey, North Dakota, Oregon, South Carolina, Washington, and Wisconsin.

It seems that too many politicians are focused on maintaining certain government spending levels, rather than being focused on the well being of taxpayers, and their state's competitiveness and economy.

State and local policymakers should take a look at a new report I wrote for the Small Business & Entrepreneurship Council - the "Business Tax Index 2009: Best to Worst State Tax Systems for Entrepreneurship and Small Business." The Index ranks the 50 states and District of Columbia according to the costs imposed by their tax systems on entrepreneurship and small business.

The Index is based on 16 different tax measures. These are combined into one tax score that allows the 50 states and District of Columbia to be compared. Among the taxes included are income, property, death/inheritance, unemployment, and various consumption-based taxes, including state gas and diesel levies.

According to the "Business Tax Index 2009," the 15 best state tax systems are: 1) South Dakota, 2) Nevada, 3) Wyonming, 4) Washington, 5) Texas, 6) Florida, 7) Alaska, 8) Colorado, 9) Alabama, 10) Ohio, 11) South Carolina, 12) Mississippi, 13) Tennessee, 14) Missouri, and 15) Oklahoma.

The 15 worst state tax systems are: 37) Hawaii, 38) North Carolina, 39) West Virginia, 40) Nebraska, 41) Idaho, 42) Massachusetts, 43) Vermont, 44) Rhode Island, 45) Iowa, 46) New York, 47) California, 48) Maine, 49) Minnesota, 50) New Jersey, and 51) District of Columbia.

Lawmakers need to be aware of both the overall tax burden they impose, as well as the economic effects of each kind of tax. While all taxes hit business directly or indirectly, different taxes affect economic decision-making in different ways. For example, income taxes are the most worrisome, as they impact incentives for working, investing and entrepreneurship. Property taxes affect decisions regarding investments in building and housing. And consumption-based taxes can divert and reduce consumer purchases.

In the end, the key point is that taxes matter - at the federal, state and local levels of government. Taxes matter to consumers, entrepreneurs, investors, businesses, state competitiveness, economic growth and job creation.

Taxes cannot be increased with impunity. There is a real economic cost.

In the current economy, the last thing state and local lawmakers should be focused on is raising taxes. Instead, they should concentrate on tax relief measures that can help entrepreneurs and investors spur the economy forward.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.
Copyright 2009. All Rights Reserved.


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