United States Small Business Administration
Office of Advocacy
RS 166
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Purpose
The use of public funds to finance state economic development
tax incentives is an important and controversial policy issue.
In debates about the effectiveness of subsidies in influencing
investment location, inter-business equity is a recurring theme.
Small domestic firms protest that tax incentives benefit primarily
large multi-state corporations. This study examines several dimensions
of the proposition that small businesses are treated unequally
by business tax structures at the state and local levels.
The goals of the analysis are to offer an alternative way of evaluating
the impact of state and local business tax policy on small versus
large firms, to focus attention on the major types of tax incentives
shaping the current economic development agenda, and to illustrate
the application of comparative tax burden analysis for the benefit
of citizens and government decision makers.
Scope and Methodology
The research progressed through four stages: the development of
a conceptual framework for the investment location decision; the
formulation of a firm-relevant measure for comparing the incentive
effects of differential tax burdens across jurisdictions and firm
sizes; application of the measure to the tax structures of the
six states in the U.S. Small Business Administration's Region
V; and discussion of the study's policy implications.
The major determinants of comparative tax burdens are firm operating
characteristics, particularly the composition and location of
capital assets and the geographic distribution of product sales.
The relevant standard for measuring the incentive effects of tax-cost
differentials is the after-tax rate of return on an incremental
investment. This measure captures the combined weight and interrelationships
of federal, state, and local taxes with respect to capital income
in the context of the investment decision process.
Highlights
Ordering Information
The complete report is available from:
National Technical Information Service
U.S. Department of Commerce
5285 Port Royal Road
Springfield, VA 22161
(703) 487 - 4650
(703) 487 - 4639 (TDD)
Order Number: PB96 13121
Cost: A09/$27.00; A02/$12.50 Microf.
*Last Modified 6-11-01