Theoretically, the reason governments tax businesses is to support the costs that businesses impose on taxpayers, or rather, to pay for the things and services that governments provide that specifically benefit businesses.
In practice however, the politicians and bureaucrats who run governments tend to look at businesses purely a source of potential revenue for funding their ambitions. The only real question is to what extent do they do so, and the answer to that question can have a significant impact on the future growth of businesses within a given government jurisdiction.
The accounting firm Ernst & Young address that issue in their January 2009 report Total State and Local Business Taxes, explaining how the burden of state and local government taxes on businesses impacts the potential for their future economic growth:
If state and local business taxes were equal to the value of the benefits business received from state and local public services, they could be considered a payment for services and taxes would not influence business location decisions or impact competitiveness. However, if state and local business taxes exceend the value of the benefits received from government services, the difference represents an excess cost to business that will reduce profitability in the absence of shifting the tax through higher prices or lower payments to labor. When such excess costs exists, they can affect a company's choice of locations.
To that end, Ernst & Young calculated each U.S. state's business tax burden ratio - the ratio of business taxes to benefits received by businesses in each of the 50 U.S. states and the District of Columbia. We've presented their data in the dynamic table below, which you can sort either from high-to-low or low-to-high value by clicking each of the column headings:
| Ratio of Business Taxes to Government Expenditures Benefiting Businesses, FY2006 |
|---|
| State | 2006 State and Local Business Tax Collections ($billions) | 2006 State and Local Expenditures That Benefit Business ($billions) | Ratio of Business Taxes to Expenditures That Benefit Business |
|---|---|---|---|
| Alabama | 6.0 | 3.8 | 1.58 |
| Alaska | 2.9 | 1.2 | 2.53 |
| Arizona | 9.8 | 6.0 | 1.64 |
| Arkansas | 3.5 | 2.3 | 1.51 |
| California | 70.2 | 42.1 | 1.67 |
| Colorado | 8.0 | 4.1 | 1.95 |
| Connecticut | 7.0 | 4.0 | 1.74 |
| Delaware | 1.9 | 1.1 | 1.72 |
| Florida | 31.6 | 19.9 | 1.59 |
| Georgia | 13.3 | 6.8 | 1.95 |
| Hawaii | 2.4 | 1.4 | 1.77 |
| Idaho | 1.9 | 1.2 | 1.57 |
| Illinois | 25.6 | 11.9 | 2.15 |
| Indiana | 10.1 | 5.2 | 1.94 |
| Iowa | 4.8 | 3.0 | 1.61 |
| Kansas | 5.2 | 2.9 | 1.83 |
| Kentucky | 6.5 | 3.6 | 1.80 |
| Louisiana | 9.7 | 5.2 | 1.85 |
| Maine | 2.8 | 1.2 | 2.23 |
| Maryland | 8.6 | 5.9 | 1.47 |
| Massachusetts | 12.7 | 7.1 | 1.79 |
| Michigan | 16.3 | 10.0 | 1.63 |
| Minnesota | 9.3 | 4.5 | 2.08 |
| Mississippi | 4.0 | 2.4 | 1.70 |
| Missouri | 7.7 | 4.5 | 1.71 |
| Montana | 1.6 | 0.9 | 1.73 |
| Nebraska | 3.3 | 1.8 | 1.86 |
| Nevada | 4.9 | 3.5 | 1.42 |
| New Hampshire | 2.5 | 1.2 | 2.18 |
| New Jersey | 18.1 | 9.8 | 1.85 |
| New Mexico | 3.9 | 2.3 | 1.69 |
| New York | 52.2 | 25.6 | 2.04 |
| North carolina | 11.6 | 7.3 | 1.58 |
| North Dakota | 1.5 | 0.7 | 2.06 |
| Ohio | 18.0 | 10.2 | 1.77 |
| Oklahoma | 5.8 | 2.8 | 2.09 |
| Oregon | 4.7 | 3.3 | 1.43 |
| Pennsylvania | 21.8 | 11.1 | 1.97 |
| Rhode Island | 2.2 | 1.3 | 1.78 |
| South Carolina | 5.6 | 3.3 | 1.70 |
| South Dakota | 1.4 | 0.7 | 1.98 |
| Tennessee | 9.0 | 4.2 | 2.15 |
| Texas | 47.6 | 21.5 | 2.22 |
| Utah | 3.4 | 2.2 | 1.49 |
| Vermont | 1.3 | 0.7 | 1.90 |
| Virginia | 11.1 | 7.7 | 1.43 |
| Washington | 13.7 | 6.4 | 2.14 |
| West Virginia | 3.2 | 1.6 | 2.05 |
| Wisconsin | 9.1 | 6.0 | 1.54 |
| Wyoming | 2.4 | 0.6 | 4.21 |
| District of Columbia | 2.1 | 1.0 | 2.04 |
| United States (Total) | 543.9 | 297.5 | 1.83 |
For the results, Ernst & Young estimate that 25% of the cost of education in each state directly benefits businesses. They also state that the data in the table:
... illustrates the range of tax to benefit ratios, from 1.43 in Oregon to 4.21 in Wyoming. In other words, in every state the business tax burden exceeds the value of government services that directly benefit business.
Which means that every one of the U.S. states are unnecessarily putting themselves and their citizens at a competitive disadvantage.
For our part, we were surprised at the high business tax-to-business benefit ratios determined for both Alaska and Wyoming, which both have reputations for being low-tax states, but Ernst and Young explain that this result is due to "their significant severance taxes."
HT: King Banaian
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