The Courant recently reported on how various organizations and individuals reacted to a new study on state and local business taxes (“Is Our State a Tax Haven?” August 4, 2011). The study, which Ernst and Young prepared for the Council on State Taxation, examined the total amount of taxes businesses paid to state and local governments in 2010 and the ratio between the taxes businesses paid and the total value of goods and services they produced or delivered. (Total State and Local Business Taxes: State-by-State Estimates for Fiscal Year 2010, July 2011)
The study’s first finding was straightforward. Nationally, businesses paid about $619 billion in state and local taxes in FY 2010. Interestingly, “most states experienced declining state tax revenue and positive local revenue growth in FY 2010, which is the result of significantly different tax structures at the state and local levels.” (The study doesn’t compare the change in state and local revenue flows from FY 09 to FY 10.)
The study’s second finding—tax burden—seemed to draw the most attention. The study measures that burden by dividing the total amount of taxes businesses paid by the total value of goods and services businesses produced. The outcome shows total taxes as a share or percentage of the total value of goods and services. Consequently, the tax burden increases as the share or percentage of taxes increases. According to this measure, Connecticut’s tax burden is light—3.3%—compared to the average for all states—5%.
Is this a good way to measure tax burden? Should states base their fiscal and economic development policy on this measure? The study had two caveats:
1. The measure doesn’t provide enough information to evaluate a state’s competitiveness. The measure lumps all business taxes and business goods and services together. It potentially masks significant differences. States at or below the national average “may impose relatively high taxes on capital-intensive manufacturers, while imposing relatively low taxes on labor-intensive industries.”
2. Measuring the average tax burden on businesses masks the tax burden borne by individual businesses. It’s one way to evaluate a state’s business tax structure, but it is not “a clear indicator of the competitiveness of a state’s business tax system.”
