Inconvenient Skeptics

We came across two stories via Google News today–one in the NY Times–that express misgivings over some of the claims and tactics in Vice President Gore’s ‘An Inconvenient Truth’. The Sydney Herald (Australia) summed up the objections this way: "The main charges are that he has skated over the Earth’s history of climate change and that his talk of impending doom ignores that change is a slow-motion process."

State & Local Business Taxes

A new study from Ernst & Young on state and local tax burdens on business offers some important insights. The following bullet points are from the press release, with our comments in brackets:

• State and local business taxes totaled $554 billion in FY2006, up 10.2% from the prior year. [As business earnings go, so go tax revenues. A sound tax code incentivizes productive 'above ground' activity without distorting the choices faced by economic agents.]

   

• Property taxes were the largest state and local business tax, accounting for $205 billion in 2006, representing 37 percent of total state and local business taxes. Property taxes are an important consideration for where companies locate their headquarters, facilities, and operations. [As noted above, the strategic objectives for a tax system outlined are pretty straightforward. It gets a lot messier when specific strategies and tactics are considered. Who and what should be taxed, and at what rate? What strategies will maximize efficiency and minimize distortions? Who will realize disproportionate burdens/benefits, and what are the likely effects on the local economy?]

   

• Sales taxes on business inputs were the second largest state and local business, accounting for $125 billion in 2006, or 23 percent of total state and local business taxes. Although most people think sales taxes fall on retail sales to consumers, 43% of those taxes fall on business purchases of machinery and supplies. [A powerful datapoint for those who favor a consumption based tax system.]

   

• Corporate income tax totaled $52 billion in 2006, representing only 9 percent of total state and local business taxes nationally, even after rising 76 percent since 2002. When individual income taxes paid by owners of non-corporate businesses are included, state and local income taxes on business account for 13 percent of total state and local business taxes. [A couple of thoughts on this one: (1) It's a wonderful datapoint for demonstrating how 'spin' happens: "Businesses pay only 9% of state and local taxes!!!" "The state and local tax burden has risen 76% since 2002!!!" (2) Far more detail is needed for this datapoint to have any value--for example, a comparative analysis of the relationship between state/local tax codes and the composition of state/local tax revenue.]

   

• Over the last four years, state and local taxes on business rose faster than total state and local taxes. As a result, businesses have paid a major portion of the additional state and local taxes collected. Businesses paid 49 percent of the entire increase in state and local taxes from fiscal year 2002 to 2006. [More detail needed here too--is this a business cycle effect, or a secular shift? The former would argue for ensuring favorable business climates, while the latter would indicate that the opposite is happening.]

   

• The composition of total state and local business taxes paid varies by industry, with manufacturing and transportation continuing to face significant property and sales taxes on business property. Traditionally-regulated businesses pay significant industry-specific excise and gross receipts taxes. [This issue, like property taxes, is a messy one, and difficult for any politician or tax authority to navigate. Is the objective of a state/local tax system to collect taxes efficiently, while maximizing economic opportunity and minimizing distortions? Or is it political expediency? We hear frequently about the contraction in major parts of the U.S. manufacturing base. While a significant role is often attributed to U.S. labor costs, we hear far less often about tax codes and other regulations at all government levels. Without an understanding of these many factors, the political conversation becomes a minefield of contradictions, distortions, and unintended consequences.]