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© 2004-2011 Lincoln Institute of Land Policy. All rights reserved.
Principles and Evidence about
State and Local Business Taxes
Prepared for
ECONOMIC PERSPECTIVES ON STATE AND LOCAL TAXES
DAVID MERRIMAN, PROFESSOR U OF ILLINOIS CHICAGO AND
VISITING FELLOW, LINCOLN INSTITUTE OF LAND POLICY
December 4, 2015
Agenda
 Although businesses do not pay taxes (people do),
businesses remit a lot of taxes.
 As a state-local tax remitted by businesses, property tax is
much larger than income or sales taxes.
 Rationale(s) for business taxes: conventional wisdom
 Previous studies show that businesses pay more in
property taxes than they receive in benefits.
 The business/household split varies substantial across
cities (some data about New England)
 Rationale(s) for business taxes: alternative to the
conventional wisdom
2
Business and state and local gov’t taxes
 Fundamental economic principle is that “business don’t
pay taxes, people do”
 Yet, business have significant tax liabilities
 In most states there are parallel individual and business tax
systems for
– Income tax
– Property tax
 There are also significant business user fees/license fees.
 Business are also central to administration of household
taxation
 Businesses withhold income from wages and remit to tax
authorities
 Businesses are primary sales tax collectors
 (Landlords collect property tax on behalf of tenants)
3
Business and tax administration
 What is the justification for business involvement in tax
administration?
 There are “economies of scale” from having businesses
involved in tax administration.
 Monitoring and enforcement is less costly when businesses are
responsible for collecting and remitting taxes.
 Combination of business and individual participation in tax
administration facilitates cross-validation which contributes to
tax compliance.
4
What are business taxes and how big are
they?
 Inherent ambiguity in the term “business tax” since
burden of all taxes eventually falls on some individual
 Despite this, consensus in applied policy literature that
‘business taxes’ include most taxes with an impact
incidence on business.
 Stylized facts from many studies show that business
taxes account for almost half of all S&L tax revenue.
 For example, Phillips et. al. (2014) find that the business share
of total S&L taxes is 44.9%
5
Among S&L business taxes property tax is
the largest
6
Rationales for direct business taxation:
conventional wisdom
What is the justification for “business taxes”?
Why should businesses “pay taxes” when the
ultimate burden must fall on some individual
(consumer, supplier, or owner)?
Conventional wisdom (among economists)
 Oakland and Testa (1996)….general business
taxation should …recover the costs of public
services rendered to the business community
• Rationale: If business taxes are
• less than the cost of gov’t business services firms will operate even
when the resource cost of their production is above the amount
consumers are willing and able to pay.
• more than the cost of gov’t business services firms will not operate
even when the resource cost of their production is below what
consumers are willing and able to pay.
7
8
S&L business tax payments exceed the cost of services
No benefit
25%of cost of
education expense
50%of cost of
education expense
Ratio of taxes paid
to value of benefits
to business
3.26 1.75 1.2
Assumption about how much education expenditures
benefit business
Ratio of S&L tax payments to value of S&L gov't services to business
(US in 2013)
Source: Phillips, Andrew, Caroline Sallee, Katie Ballard and Daniel Sufranski 2014. Total state and local
business taxes for fiscal year 2013. Ernst and Young and Council on State Taxation.
(http://www.cost.org/WorkArea/DownloadAsset.aspx?id=87982)
9
2
4
6
8
12 12
4
2
4 4
6
3
2
1 1 1 1 1
05101520
Frequency
0.000 0.010 0.020 0.030 0.040
Home ETR
Home ETR
1
3
7
6
9
5
4
3
5
4
3
6 6
3
1 1 1
2
3
1
05101520
Frequency
0.000 0.010 0.020 0.030 0.040
Commercial ETR
Commercial ETR
20 20
7
4
2
3 3
4
1
3
2
1 1 1 1 1
05101520
Frequency
1 2 3 4 5
Ratio commercial to home ETR
Ratio
Source:Minnesota Center for Fiscal Excellence (various years) and author's calculations.
Home ETRs are for the median-valued owner-occupied house in each city. Commercial ETRs are
for a parcel with a nominal market value of $1 million and $200,000 worth of fixtures.
Distribution of home and commercial ETRs and their ratio
in 2013
10
0.0000.0100.0200.0300.040
1995 2000 2005 2010 2015
year_
commercial ETR home ETR
Burlington, VT
0.0000.0100.0200.0300.040
1995 2000 2005 2010 2015
year_
commercial ETR home ETR
Providence,RI
0.0000.0100.0200.0300.040
1995 2000 2005 2010 2015
year_
commercial ETR home ETR
Manchester, NH
0.0000.0100.0200.0300.040
1995 2000 2005 2010 2015
year_
commercial ETR home ETR
Boston, Mass
0.0000.0100.0200.0300.040
1995 2000 2005 2010 2015
year_
commercial ETR home ETR
Portland, ME
0.0000.0100.0200.0300.040
1995 2000 2005 2010 2015
year_
commercial ETR home ETR
Bridgeport, CT
Source:Minnesota Center for Fiscal Excellence (various years) and author's calculations
Tax rates as a share of market value
New England Cities
Home and Commercial Effective Property Tax Rates
Data on relative business property tax rates
11
Year Home Commercial Ratio Home Commercial Ratio
1998 0.021 0.031 1.666 0.014 0.021 1.772
2000 0.021 0.030 1.611 0.014 0.021 1.707
2002 0.021 0.027 1.531 0.014 0.020 1.642
2004 0.019 0.025 1.764 0.014 0.020 1.607
2005 0.015 0.024 1.888 0.015 0.020 1.546
2006 0.013 0.021 1.876 0.014 0.019 1.564
2007 0.013 0.020 1.847 0.013 0.019 1.615
2008 0.015 0.021 1.735 0.013 0.018 1.629
2009 0.016 0.022 1.809 0.013 0.018 1.590
2010 0.016 0.023 1.681 0.014 0.019 1.560
2011 0.019 0.025 1.653 0.014 0.019 1.540
2012 0.019 0.026 1.719 0.014 0.020 1.609
2013 0.022 0.027 1.637 0.015 0.020 1.551
New England Cities Non-New England Cities
Source: Minnesota Center for Fiscal Excellence (various years) and author's
calculations. Home ETRs are for the Median-Valued Owner-Occupied House in
each city in each year. Commercial ETRs are for a parcel with a nominal market
value of $1 million and $200,000 worth of fixtures
Table 1
Home and commercial effective property tax rates (ETRs) and their ratios in
New England and Non-New England Cities in Various Years
12
If business taxes
are so high in
some places why
don’t business
relocate to lower
tax places?
Rationales for direct business taxation:
alternative (complementary) explanations
Business property taxation transfers “excessive” business
profits to residents.
 Businesses locate where profit is maximized. Locations that
are more profitable than the next best alternative can be
attractive locations even when business taxes exceed the cost
of business public services.
 Gov’t has some bargaining power.
 Gov’t must balance desire for business tax revenue against
desire for investment and jobs.
 Gov’t’s use a combination of taxes, business tax incentives,
regulation (e.g. zoning) and regulatory relief to balance
competing interests.
13

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Principles and Evidence About State and Local Business Taxes

  • 1. © 2004-2011 Lincoln Institute of Land Policy. All rights reserved. Principles and Evidence about State and Local Business Taxes Prepared for ECONOMIC PERSPECTIVES ON STATE AND LOCAL TAXES DAVID MERRIMAN, PROFESSOR U OF ILLINOIS CHICAGO AND VISITING FELLOW, LINCOLN INSTITUTE OF LAND POLICY December 4, 2015
  • 2. Agenda  Although businesses do not pay taxes (people do), businesses remit a lot of taxes.  As a state-local tax remitted by businesses, property tax is much larger than income or sales taxes.  Rationale(s) for business taxes: conventional wisdom  Previous studies show that businesses pay more in property taxes than they receive in benefits.  The business/household split varies substantial across cities (some data about New England)  Rationale(s) for business taxes: alternative to the conventional wisdom 2
  • 3. Business and state and local gov’t taxes  Fundamental economic principle is that “business don’t pay taxes, people do”  Yet, business have significant tax liabilities  In most states there are parallel individual and business tax systems for – Income tax – Property tax  There are also significant business user fees/license fees.  Business are also central to administration of household taxation  Businesses withhold income from wages and remit to tax authorities  Businesses are primary sales tax collectors  (Landlords collect property tax on behalf of tenants) 3
  • 4. Business and tax administration  What is the justification for business involvement in tax administration?  There are “economies of scale” from having businesses involved in tax administration.  Monitoring and enforcement is less costly when businesses are responsible for collecting and remitting taxes.  Combination of business and individual participation in tax administration facilitates cross-validation which contributes to tax compliance. 4
  • 5. What are business taxes and how big are they?  Inherent ambiguity in the term “business tax” since burden of all taxes eventually falls on some individual  Despite this, consensus in applied policy literature that ‘business taxes’ include most taxes with an impact incidence on business.  Stylized facts from many studies show that business taxes account for almost half of all S&L tax revenue.  For example, Phillips et. al. (2014) find that the business share of total S&L taxes is 44.9% 5
  • 6. Among S&L business taxes property tax is the largest 6
  • 7. Rationales for direct business taxation: conventional wisdom What is the justification for “business taxes”? Why should businesses “pay taxes” when the ultimate burden must fall on some individual (consumer, supplier, or owner)? Conventional wisdom (among economists)  Oakland and Testa (1996)….general business taxation should …recover the costs of public services rendered to the business community • Rationale: If business taxes are • less than the cost of gov’t business services firms will operate even when the resource cost of their production is above the amount consumers are willing and able to pay. • more than the cost of gov’t business services firms will not operate even when the resource cost of their production is below what consumers are willing and able to pay. 7
  • 8. 8 S&L business tax payments exceed the cost of services No benefit 25%of cost of education expense 50%of cost of education expense Ratio of taxes paid to value of benefits to business 3.26 1.75 1.2 Assumption about how much education expenditures benefit business Ratio of S&L tax payments to value of S&L gov't services to business (US in 2013) Source: Phillips, Andrew, Caroline Sallee, Katie Ballard and Daniel Sufranski 2014. Total state and local business taxes for fiscal year 2013. Ernst and Young and Council on State Taxation. (http://www.cost.org/WorkArea/DownloadAsset.aspx?id=87982)
  • 9. 9 2 4 6 8 12 12 4 2 4 4 6 3 2 1 1 1 1 1 05101520 Frequency 0.000 0.010 0.020 0.030 0.040 Home ETR Home ETR 1 3 7 6 9 5 4 3 5 4 3 6 6 3 1 1 1 2 3 1 05101520 Frequency 0.000 0.010 0.020 0.030 0.040 Commercial ETR Commercial ETR 20 20 7 4 2 3 3 4 1 3 2 1 1 1 1 1 05101520 Frequency 1 2 3 4 5 Ratio commercial to home ETR Ratio Source:Minnesota Center for Fiscal Excellence (various years) and author's calculations. Home ETRs are for the median-valued owner-occupied house in each city. Commercial ETRs are for a parcel with a nominal market value of $1 million and $200,000 worth of fixtures. Distribution of home and commercial ETRs and their ratio in 2013
  • 10. 10 0.0000.0100.0200.0300.040 1995 2000 2005 2010 2015 year_ commercial ETR home ETR Burlington, VT 0.0000.0100.0200.0300.040 1995 2000 2005 2010 2015 year_ commercial ETR home ETR Providence,RI 0.0000.0100.0200.0300.040 1995 2000 2005 2010 2015 year_ commercial ETR home ETR Manchester, NH 0.0000.0100.0200.0300.040 1995 2000 2005 2010 2015 year_ commercial ETR home ETR Boston, Mass 0.0000.0100.0200.0300.040 1995 2000 2005 2010 2015 year_ commercial ETR home ETR Portland, ME 0.0000.0100.0200.0300.040 1995 2000 2005 2010 2015 year_ commercial ETR home ETR Bridgeport, CT Source:Minnesota Center for Fiscal Excellence (various years) and author's calculations Tax rates as a share of market value New England Cities Home and Commercial Effective Property Tax Rates
  • 11. Data on relative business property tax rates 11 Year Home Commercial Ratio Home Commercial Ratio 1998 0.021 0.031 1.666 0.014 0.021 1.772 2000 0.021 0.030 1.611 0.014 0.021 1.707 2002 0.021 0.027 1.531 0.014 0.020 1.642 2004 0.019 0.025 1.764 0.014 0.020 1.607 2005 0.015 0.024 1.888 0.015 0.020 1.546 2006 0.013 0.021 1.876 0.014 0.019 1.564 2007 0.013 0.020 1.847 0.013 0.019 1.615 2008 0.015 0.021 1.735 0.013 0.018 1.629 2009 0.016 0.022 1.809 0.013 0.018 1.590 2010 0.016 0.023 1.681 0.014 0.019 1.560 2011 0.019 0.025 1.653 0.014 0.019 1.540 2012 0.019 0.026 1.719 0.014 0.020 1.609 2013 0.022 0.027 1.637 0.015 0.020 1.551 New England Cities Non-New England Cities Source: Minnesota Center for Fiscal Excellence (various years) and author's calculations. Home ETRs are for the Median-Valued Owner-Occupied House in each city in each year. Commercial ETRs are for a parcel with a nominal market value of $1 million and $200,000 worth of fixtures Table 1 Home and commercial effective property tax rates (ETRs) and their ratios in New England and Non-New England Cities in Various Years
  • 12. 12 If business taxes are so high in some places why don’t business relocate to lower tax places?
  • 13. Rationales for direct business taxation: alternative (complementary) explanations Business property taxation transfers “excessive” business profits to residents.  Businesses locate where profit is maximized. Locations that are more profitable than the next best alternative can be attractive locations even when business taxes exceed the cost of business public services.  Gov’t has some bargaining power.  Gov’t must balance desire for business tax revenue against desire for investment and jobs.  Gov’t’s use a combination of taxes, business tax incentives, regulation (e.g. zoning) and regulatory relief to balance competing interests. 13