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Fiscal Policy Richard Falknor on 27 Jan 2012 03:17 pm

New State Business Tax Climate Index: MD Among Worst

The invaluable Tax Foundation has just published their 2012 State Business Tax Climate Index by Mark Robyn – click here.

Reports economist Robyn —

“New Jersey scores at the bottom by having the third-worst individual income tax, the fifth-worst sales tax, the 13th-worst corporate tax, and the second-worst property tax. Rhode Island has improved from 47th to 46th by implementing a modest individual income tax reform, but still has the worst unemployment tax system and fifth-worst property tax system. Maryland improved from 44th to 42nd this year due mostly to the expiration of the state’s ‘millionaire’s tax’ on high-income earners. The states in the bottom 10 suffer from the same afflictions: complex, non-neutral taxes with comparatively high rates.” (Underscoring Forum’s.)

Of course, the problem in Maryland lies deep in its political culture.  As Steve Hanke and Stephen Walters wrote in 2006 —

“Over 150,000 Marylanders . . . are on the federal (nonmilitary) payroll; they are concentrated in central Maryland, near the nation’s capital. Nearly 268,000 more Marylanders draw checks from state and local government. With so many workers in a sector where revenues appear to arrive automatically and inefficiency never leads to bankruptcy, our state’s resulting political culture is quite predictable. Many Marylanders are simply unmindful of the necessities of survival in the private sector: pleasing customers, controlling costs and satisfying shareholders. Thanks to the federal tax dollars collected from the rest of the country and spent in Maryland, the prevailing view of economic reality is inverted: The public sector is seen as the engine of prosperity, with the private one along for the ride. Reflecting this culture, our legislators often behave as if business is a problem to be solved.” (Underscoring Forum’s.)

The Old Dominion

With a strong two-party system — and a dominant, but questionably pro-market — Republican administration, why can’t Virginia (ranking at number 26) be among the top ten?

The Tax Foundation report suggests some answers to this question —

“The 10 best states in this year’s Tax Climate Index are:

1. Wyoming

2. South Dakota

3. Nevada

4. Alaska

5. Florida

6. New Hampshire

7. Washington

8. Montana

9. Texas

10. Utah”

Explains Mark Robyn —

“It is obvious that the absence of a major tax is a dominant factor in vaulting many of these 10 states to the top of the rankings. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate tax, the individual income tax, or the sales tax. Wyoming, Nevada and South Dakota have no corporate or individual income tax; Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire and Montana have no sales tax. The lesson is simple: a state that raises sufficient revenue without one of the major taxes will, all things being equal, have an advantage over those states that levy every tax in the state tax collector’s arsenal.” (Underscoring Forum’s.)

Virginia had a chance to try this approach with the 2010 proposal of Richmond’s Bob Marcellus “Ending the Corporate Tax Will Create Jobs” (Richmond Times-Dispatch), which apparently went nowhere in the McDonnell Administration.

Marcellus had written —

“Abolishing this tax, with a date certain 12 to 24 months in the future, creates a ‘wow’ factor for growth while still building tax revenue until the actual implementation. This window buffers state revenue while building the base that culminates in a sustained growth of revenue created by an ensuing 0.5 percentage point to 1 percentage point expansion in the annual growth rate of Virginia’s GDP. This roughly translates (on the low end of expectations) to creating new jobs for the entire city of Bristol — population 17,000 — every year. The Congressional Budget Office reported in 2006 that more than 70 percent of the burden of corporate income taxes falls on labor. A European Union study of 50,000 businesses found an even stronger connection to wages — a 1 percent increase in corporate income tax rates leads to a 0.92 percent decrease in real wages.”

And as Marcellus pointed out —

“I note that this stimulus to a state or nation’s economy does not discriminate as to industry or interest group. Eliminating the corporate income tax will offer a true stimulus that requires no bias — you do not have to have a stake in a government-subsidized industry to benefit. The current federal ‘stimulus’ initiatives — in the form of expanded government spending and income redistribution — ignore the important difference between market investments of private capital on the one hand and government programs that usurp markets and drain away private investment capital — or dilute our currency — on the other.” (Underscoring Forum’s.)

Readers should try at least to eyeball the entire 2012 State Business Tax Climate Index here. They will find it full of useful data and insights.

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