When it comes to choosing a state to open a business, taxes are often a deciding factor.
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According to the Tax Foundation’s 2014 State Business Tax Climate Index, states are facing steep competition from each other when it comes to attracting and retaining business. In fact, authors Scott Drenkard and Joseph Henchman say states need to be more concerned about competing with other states than they do about globalization and outsourcing.
“State lawmakers are right to be concerned about how their states rank in the global competition for jobs and capital, but they need to be more concerned with companies moving from Detroit, MI, to Dayton, OH, rather than from Detroit to New Delhi,” write the authors.
Drenkard and Henchman say low taxes help convince businesses to relocate: In 2010, Northrop Grumman moved its headquarters to Virginia, rather than Maryland, because of the better business tax climate. (Virginia ranks 26th overall according to the 2014 index, while Maryland is at 41st place.)
“Anecdotes such as these reinforce what we know from economic theory: taxes matter to businesses, and those places with the most competitive tax systems will reap the benefits of business-friendly tax climates,” write Drenkard and Henchman.
While some states try to attract businesses with incentives, Drenkard and Henchman say this strategy rarely works out. They cite the case of North Carolina providing $240 million in incentives to get Dell to move its plant to the state, only to have the technology company close its N.C.-based plant after four years.
“Lawmakers create these deals under the banner of job creation and economic development, but the truth is that if a state needs to offer such packages, it is most likely covering for a woeful business tax climate,” write the authors.