Can State Tax Policies Be Used to Grow Small Businesses? Erin Borchers Creighton University and John Deskins West Virginia University, BBER

Transcription

1 Can State Tax Policies Be Used to Grow Small Businesses? Erin Borchers Creighton University and John Deskins West Virginia University, BBER AUBER 2013

2 Prior Literature Most tax policy studies in the area tend to focus on federal tax policy relatively few at the state level. Most of the studies that examine the relationship between state tax policy and small business activity tend to focus on measures of entrepreneurship, such as selfemployment or business start-ups.

3 Our Contribution Using a panel of state-level data, we estimate a series of regression models to understand the effect of state tax policy on four measures of small business growth: Small business firms Small business establishments Small business employment Small business payroll Small businesses are defined as any business with less than 500 employees. Data are from the Small Business Administration/Census

4 Our Contribution Our study fits between: The literature on the effect of state tax policy on overall state economic growth and The literature on state tax policy and more precise smallbusiness-oriented measures such as self-employment, business start-ups, or the like.

5 Our Structure Our structure, econometric approach, and the set of tax policy parameters we consider resembles Bruce and Deskins (2012), who use a panel of statelevel data to examine the effect of a wide array of state tax policies on two measures of self-employment.

6 Large vs. Small Business Growth We also estimate a series of parallel models in which we replace our small business measures with parallel large business measures. It is reasonable to believe that large businesses may respond differently to state tax policy: They may hold more bargaining power to use to receive economic development incentives. The may be better able to avoid statutory tax policy through income shifting strategies or through other tax planning strategies.

7 Tax Explanatory Variables Sales Tax Rate, Top Marginal PIT Rate, Top Marginal CIT Rate Corporate Income Tax Parameters Sales Factor Apportionment Combined Reporting Throwback Rule Inheritance, Estate, and Gift Tax Homestead Exemption

8 Other Control Variables State Unemployment Rate State Median Income Share of Adult Population with a College Degree State Poverty Rate State Population Density Age Distribution of State Population Age 25-44, Age 45-64, Age 65+ State Industrial Composition Manufacturing Share of GSP, Agricultural Share of GSP

9 Summary Four left-hand-side measures We have four basic models: Small Business Growth Statutory Tax Policy Large Business Growth Statutory Tax Policy Small Business Share Tax Shares Large Business Share Tax Shares 16 regression models total (plus robustness checks)

10 Econometric Specification We specify each LHS measure as the growth rate of the given measure of small business activity from time t to time t+1. RHS variables are for time t. We control for the level of small business activity at time t to account for any catch-up effect. Each model includes state- and year fixed effects. Data are for 1989 through 2007.

11 Our Contribution - Summarized We fill a gap between a) the large literature on state tax policy and overall economic growth and b) the literature on state tax policy on precise measures of entrepreneurship. Explicit focus on state taxes. Consideration of a broader set of tax policies than typically observed.

12 Data Overview: Total Small Business Firms and Establishments, by Year Small Firms Thousands Small Firm Establishments Year

13 Data Overview: Total Large Business Firms and Establishments, by Year Thousands Large Firms Large Firm Establishments Year

14 Data Overview: Total Small and Large Business Employment, by Year Small Firm Employment Millions Large Firm Employment Year

15 6000 Data Overview: Total Small and Large Business Payroll, by Year Large Firm Payroll Millions Small Firm Payroll Year

16 Data Overview Long-run small business growth rates vary widely among states.

17 Results: Small Business Growth and Statutory Tax Policy Variable Small Business Firm Growth Small Business Establishment Growth Small Business Employment Growth Small Business Payroll Growth Sales Tax Rate (%) *** *** * ** Top Personal Income Tax Rate (%) 0.047*** 0.045*** Top Corporate Income Tax Rate (%) *** *** *** *** Sales Factor Apportionment (%) ** ** Combined Reporting Throwback Rule *** *** *** *** Inheritance, Estate, and Gift *** *** Homestead Exemption (thousands) 0.002* 0.002** 0.002** Homestead Unlimited ** ** * Ln(Small Business Activity t ) 0.210*** 0.176***

18 Results: Small Business Growth and Statutory Tax Policy (Cont.) Higher sales tax rate, higher top marginal CIT rate, and the presence of a throwback rule matter consistently. CIT rate and throwback effects are probably not causal. Small (negligible) PIT effect. EIG matters. Homestead exemption matters.

19 Results: Small Business Growth and Statutory Tax Policy (Cont.) Some of the other controls matter: No evidence of a catch-up effect. Unemployment rate, poverty rate, population density, and manufacturing wage, manufacturing share of GSP negative effect generally. Age distribution matters.

20 Results: Large Business Growth and Statutory Tax Policy Large Business Large Business Large Business Large Business Establishment Employment Firm Growth Payroll Growth Variable Growth Growth Sales Tax Rate (%) * Top Personal Income Tax Rate (%) ** ** Top Corporate Income Tax Rate (%) Sales Factor Apportionment (%) ** Combined Reporting 0.289* Throwback Rule ** * ** Inheritance, Estate, and Gift * * Homestead Exemption (thousands) 0.002*** 0.004*** 0.005*** 0.004* Homestead Unlimited ** *** ** Ln(Large Business Activity t ) ***

21 Results: Large Business Growth and Statutory Tax Policy (Cont.) Significantly fewer parameters matter. The PIT rate matters for large business employment and payroll growth. Throwback rule negative effect. The homestead exemption matters.

22 Results: Small Business Growth and Tax Shares Variable Small Business Firm Growth Small Business Establishment Growth Small Business Employment Growth Small Business Payroll Growth Sales Tax Share (%) Personal Income Tax Share (%) Corporate Income Tax Share (%) *** *** *** *** Ln(Small Business Activity t ) 0.114*

23 Effective Tax Rates We replace statutory tax rates with effective tax rate measures: Almost no noteworthy differences.

24 Conclusions Evidence that state tax policy does influence small business growth. Sales rate, CIT rate, and throwback rule. Homestead exemption. Little consistent evidence that large business growth responds to state tax policy.