Wednesday, April 27, 2011

Wisconsin STILL Open for Business, Ranks 4th Best in Industry Study of Corporate Tax Rates

An industry-sponsored study released last week concludes that Wisconsin has the fourth lowest tax rate on new business investment.

The study by Ernst and Young, in conjunction with the Council on State Taxation, compares the “effective tax rate” (ETR) for each state, which is a measure of the state and local business taxes that would be incurred by a company making an investment in a new facility or expansion of an existing facility. According to the study, this approach “compares marginal taxes on new capital investment, rather than the average level of taxes paid by all businesses in the state. While both measures of tax (average and marginal) are of interest to policy-makers, marginal tax rates on new investment have the greatest impact on a state’s economic development because these are the taxes that affect business investment decisions.”

Wisconsin’s ETR on new investment is just 4.5 percent, compared to a national average of 7.9 percent. The study uses data from 2009 in calculating the effective tax rates.

It will be interesting to see whether the Governor’s office or business groups help draw attention to this study, in order to advance the goal of attracting new businesses to Wisconsin. If state leaders want to champion our state’s economic competitiveness and promote business growth, one would expect them to tout the Ernst and Young study. But for the Walker Administration it might be awkward politically to advertise a study showing that Wisconsin’s business taxes were already very competitive in 2009. Will that trump the obvious reasons for drawing attention to Wisconsin’s high ranking in the study?

The Council on State Taxation (COST), which funded the study, was formed in 1969 as an advisory committee to the Council of State Chambers of Commerce, but today it has an independent membership of nearly 600 major corporations engaged in interstate and international business. COST’s objective is “to preserve and promote the equitable and nondiscriminatory state and local taxation of multijurisdictional business entities.”

Wisconsin Manufacturers and Commerce would seem to be an obvious candidate for championing the results of the COST report – as part of an effort to convince their fellow businessmen and women that Wisconsin is where they should locate or expand their operations. But will business groups be willing to do that when it doesn’t fit their narrative that the Legislature should pass new tax cuts and roll back the targeted tax increases approved two years ago?

I’m not expert on business climate studies, and I haven’t formed an opinion yet of this one. In general, I think tax rankings and business climate studies often overestimate the importance of taxes in business location decisions, and researchers who review such rankings rarely find a correlation to the actual health and performance of businesses in the states. (See the critique of such studies in Grading Places.) That said, I think COST does a better job than most such organizations in thinking about economic competitiveness in a more nuanced way and avoiding some of the ideological agenda that taints other such analyses.

My skepticism of such studies notwithstanding, I think groups and politicians who believe in business climate and tax rankings and who want to help promote economic development in Wisconsin should be touting Wisconsin’s 4th place ranking in the COST study. If promoting business expansion is important, then the matter of whether Wisconsin achieved its ranking in 2009 or 2011 shouldn’t deter politicians and business groups from celebrating Wisconsin’s high ranking in this new study.

Jon Peacock

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