State business climates

In October the Tax Foundation published a report comparing states' tax systems in attracting new businesses and generating economic growth. The report says state lawmakers "are often tempted to lure business with lucrative tax incentives and subsidies instead of broad-based tax reform." If a state resorts to the former, "it is most likely covering for a woeful business tax climate. This can be a dangerous proposition." Instead, the authors advocate improving a state's business tax climate for the long term and propose that lawmakers remember two rules:

1. Taxes matter to business. Most importantly, taxes diminish profits. That cost is passed along to consumers, workers, or shareholders. Thus a state with lower tax costs will be more attractive to business investment, and more likely to experience economic growth.

2. States do not enact tax changes in a vacuum. Every tax law will in some way change a state's competitive position. Ultimately it will affect the state's national standing as a place to live and to do business.

The report's index is based on five component indexes: corporate tax, individual income tax, sales tax, unemployment tax, and property tax. Hawaii ranks 22nd overall.

The mission of the Tax Foundation, a nonpartisan educational organization founded in 1937, is "to educate taxpayers about sound tax policy and the size of the tax burden borne by Americans at all levels of government."

2008 State Business Tax Climate Index (pdf, 64pp/2MB)

Internet taking state cigarette taxes

A discussion paper from the Stanford Institute for Economic Policy Research (SIEPR) examines the rise of cigarette sales on the Internet and the concominant loss of cigarette tax revenues by states. According to the paper, since 2002, 36 states have raised cigarette taxes to counter budget deficits. Although technically subject to state taxes, Internet sales are vitually tax free because tax collection is ineffective. The authors cite New York State's attempt to ban Internet cigarette merchants as its estimated loss of revenue from the Internet, "800 numbers," and Indian reservation sales is $500 to $600 million annually.

The SIEPR study finds:

...the increased sensitivity from cigarette smuggling over the Internet has lessened the revenue generating potential of recent cigarette tax increases substantially. Given the continuing growth of the Internet and of Internet cigarette merchants, the results imply serious problems for state revenue authorities.

Playing with Fire: Cigarettes, Taxes and Competition from the Internet, SIEPR Discussion Paper No. 07-02 (pdf, 43pp/404kB), September 2007

Recent GAO reports

INTERNET ACCESS TAX MORATORIUM: Revenue Impacts Will Vary by State GAO-07-896T (pdf, 28pp/624kB), May 23, 2007

In 1998, Congress passed the Internet Tax Freedom Act (P.L. 105-277, Title XI, 112 Stat. 2681-719 et seq.), temporarily barring taxes by state and local governments on Internet access. GAO testified, "Because it is difficult to know what states would have done to tax Internet access services if no moratorium had existed, the total revenue implications of the moratorium are unclear." Bills have been introduced in Congress this year to make the moratorium permanent.

PEDIATRIC DRUG RESEARCH: The Study and Labeling of Drugs for Pediatric Use under the Best Pharmaceuticals for Children Act GAO-07-898T (pdf, 18pp/296kB), May 22, 2007

According to GAO, two-thirds of drugs prescribed for children have not been studied for pediatric use. Under the 2002 Best Pharmaceuticals for Children Act (BPCA), if manufacturers of drugs that are still on-patent (have marketing exclusivity) conduct pediatric studies at the requst of the Food and Drug Administration (FDA), FDA may extend the exclusivity period (no equivalent generic drugs to be marketed) for 6 months. GAO presents testimony on the drug studies conducted under BPCA for on-patent and off-patent drugs, and the impact of BPCA on the labeling of pediatric drugs.

PUBLIC TRANSPORTATION: Preliminary Analysis of Changes to and Trends in FTA's New Starts and Small Starts Programs GAO-07-812T (pdf, 30pp/496kB), May 10, 2007

In 2005, the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) was signed into law. It authorized the New Starts program in which the Federal Transit Administration (FTA) recommends funding for new fixed-guideway transit projects. New Starts spawned a separate program called Small Starts for smaller transit projects. GAO discusses changes in New Starts and future trends for New Starts and Small Starts.

TEACHER QUALITY: Approaches, Implementation, and Evaluation of Key Federal Efforts GAO-07-861T (pdf, 17pp/224kB), May 17, 2007

Title II of both the 1998 amendments to the Higher Education Act (HEA) and the No Child Left Behind Act (NCLBA) provided funds for professional development and recruitment. This testimony discusses activities under the two acts, how the Dept. of Education (Education) supports these activities, and how funds are being used.