An Alternative Measure of Business Taxation
This study provides estimates of the taxes paid by businesses in each state, an important ﬁrst step in any evaluation of short-run business tax changes or longer-run tax reform. To enable comparisons across states, the study also expresses business taxes as an effective tax rate on private sector economic activity (taxes as a share of gross state product).
The basic rationale for business taxes, recognizing that the economic burden of business taxes are ultimately borne by consumers or owners of factors of production (including workers), is to pay for government services that directly beneﬁt businesses. This section provides a comparison of business taxes to these beneﬁts in each state.
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 exceed 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 exist, they can affect a company’s choice of locations.
To estimate these excess costs, the estimates begin with state-by- state estimates of state and local spending that directly beneﬁts business, which were developed by economists at the Federal Reserve Bank of Chicago with an adjustment to the education spending component to reﬂect the uncertainty about who beneﬁ ts from education expenditures, business or households. Due to the large expenditures for education in every state, the ratio of business taxes to government expenditures for services beneﬁting business is sensitive to assumptions about who beneﬁts from public spending for education. The estimates presented in this study present a range of estimates, assuming that 0%, 25% or 50% of education expenditures directly beneﬁt business.
In nearly every state, the business tax burden exceeds the value of government services that
directly beneﬁt business, regardless of the assumption made about education spending.
Except, of course, for Oregon which offers businesses one of the best values for money of any state in the Union. Only Maryland and Nevada offer a better ratio. Here is the figure (this is tax-benefit ratio, so lower numbers mean more benefits per tax dollar):
The darker bar assumes that businesses receive about 50% of the benefits of education expenditure. This seems reasonable to me-educated people make up the workforce. In this metric businesses recieve more in the value of the services provided to them by the state than they pay in taxes.
And what of business taxes overall? Well Ernst & Young measured total business tax as a percentage of Gross State Product (GSP) - the value of all the goods and services produced in the state - and found that Oregon is in a three way tie for the lowest in the country. So according to E&Y we have the lowest business tax burden in the country (Delaware and N Carolina are the other two):
Now, these figures are for fiscal year 2009, so Oregon's relative position will slip but, at least according to E&Y, we have one of the most business friendly tax structures in the US.