by Howard Stephenson
Utah business taxes compare more favorably than most states according to a recent report from the Committee on State Taxation (COST) while Utah business incentives rank near the bottom of the 50 states, according to State Business Incentives, a study by the Council of State Governments.
Utah’s Favorable Business Taxes
The COST report, compiled by the accounting firm of Ernst & Young, uses four different formulas to express business tax burdens. According to the study, on each indicator Utah ranks among the four states in the nation with the most favorable business tax burdens. The study can be found on the web at http://statetax.org/COSTHome.cfm .
The COST study reveals that Utah’s total business taxes comprise 34% of total state and local taxes paid in 2003, ranking Utah 49th among the 50 states. Only Maryland ranks more favorably at 32%. Other Western states’ businesses taxes as a percent of total taxes were as follows: Arizona 47%, Colorado 41%, Idaho 40%, Nevada 47%, New Mexico 50%, and Wyoming 69%. The relatively high percentages in Wyoming and New Mexico are due in large part to those states’ ability to export taxes in the form of natural resource taxes. Alaska was highest at 77%, also due to taxes on natural resources. Oregon ranks 50th at 3.4% and North Carolina 49th at 3.7%
The study also compared state business tax burdens to the number of employees in each state. My this measure of $2,438 in business taxes per employee, Utah ranks 50th. Other Western states ranked as follows: Arizona 21st, Colorado 33rd, Idaho 41st, Nevada 26th, New Mexico 10th, and Wyoming 2nd. New Mexico collected $4,327 in business taxes per employee while Wyoming received $6,610 per employee. Alaska ranks highest at $8,342 per employee.
When business taxes are expressed as a percent of dollar volume of private sector economic activity, Utah ranks 48th at 3.8%. On this indicator Arizona is 5.3%, Colorado 4.0%, Idaho 4.6%, Nevada 4.7%, New Mexico 5.9% and Wyoming 7.2%. Oregon ranks 50th at 3.4% and North Carolina 49th at 3.7%
Utah ranks 47th when it comes to business taxes as a percent of capital income. Utah’s 11.3% in this category compares with neighboring states as follows: Arizona 16.8%, Colorado 15.0%, Idaho 14.5%, Nevada 14.4%, New Mexico 13.9%, and Wyoming 17.1%. Oregon ranks 50th, Delaware 49th, and North Carolina 48th.
The Ernst & Young study also reported Utah’s change in business taxes between FY 2000 to FY 2003 which was an 8% increase for the period. The 50-state average increase for the period was also 8%. The business share of growth in total taxes in each state was also reported for the same period. Utah business taxes represented 59% of total tax growth compared with a 50-state average of 65%.
Utah Study Shows Business Taxes in Middle of the Pack
A recent study by the Utah State Tax Commission shows that, contrary to the information in the COST study, Utah business taxes are not the lowest among our neighboring states. The Tax Commission study shows that Utah business tax burdens are competitive when compared to selected western states.
Utah’s state and local taxes paid by businesses as a percentage of Gross StateProduct (GSP) is 2.58%, ranking Utah third among the seven Western states studied (Wyoming and Nevada were left out of the study because of Wyoming’s unique dependence on natural resource taxes and Nevada’s gaming taxes.) The Tax Commission showed that Utah’s business tax burden fits in a tight range between 2.52 percent and 2.79 percent of GSP with five of the seven states in the study. The Tax Commission study can be found on the web at http://tax.utah.gov/esu/burdens/WTB_2003.pdf .
Utah Ranks Low in Business Incentives
Incentives for businesses to remain, expand, or locate in a state are becoming more and more popular among the 50 states, but not in Utah. The Council of State Governments’ has produced a comparison of business incentives offered in the 50 states which shows that Utah provides very few incentives to businesses compared to other states. The study, which categorizes business incentives into a group called “financial incentives” and another called “tax incentives” can be ordered from CSG on the web at www.csg.org/store/.
The study shows that Utah provides only seven of the 16 financial incentives and only seven of the 15 tax incentives listed in the study. Only North Carolina and Idaho offer fewer financial incentives than Utah and only Wyoming offers fewer tax incentives. Even the few incentives which Utah does offer are modest by comparison and require very little funding.
The Effects of Favorable Business Taxes
Utah’s favorable COST business tax ranking and competitive ranking in the Tax Commission study helps the Beehive state overcome the fact that it is a land-locked state that can’t offer coastal ports and other amenities. But we can offer a adequate business infrastructure, quality of life and employees who have a good work ethic.
But Utah should be doing more to improve business taxes and create a consistent tax policy whereby the “tools of production” are not taxed. We need a sales tax policy that taxes the final purchase by the end user instead of multiple taxes on each stage of production and distribution.
There are some policy makers who say the report suggests that businesses should be paying more of the total tax burden. However, businesses don’t pay taxes, people do. Every tax we impose on a business ultimately finds its way back to a person, either an employee of the company who sees his wages lower than they would otherwise have been, the owners in the form of lower profits, or a customer in the form of higher prices. When taxes are imposed on individuals and homeowners directly, government tends to be more accountable and voters can hold elected officials responsible.
The Utah Taxpayers Association has lead the charge for the past twelve years in convincing legislators and local policymakers that taxes on business inputs are a bad idea, but at the same time, Utah should steer clear of handing out business incentives for location. The association has worked to expand Utah’s sales tax exemption for manufacturing machinery and equipment and to enact various other exemptions on the tools Utah workers use to create wealth. The association has also worked to curtail city and county property tax handouts and sales tax handouts to retailers, arguing that retail activity will occur without incentives.
Unfortunately, city fathers have mistook revenue development for economic development and continue to forgive hundreds of millions of dollars in sales and property taxes. Despite give-away programs by the cities, Utah business incentives rank among the lowest in the nation, as shown in the CSG study above.