Chapter 7

CHAPTER 5: SPECIFIC TAX REFORMS
129 13
Presumably the original intent of imposing a tax rate schedule with graduated marginal tax rates was to make the income tax progressive. However, what progressivity exists in the states income tax structure is due to the zero tax on the first $2,630 of income, and because of the graduated marginal tax rates. However, since the marginal tax rate increases over such small steps in income, as shown in Figure 5.5, most of the progressivity occurs at lower income levels, not higher levels of income. At higher income levels, the average tax rate hardly increases at all. This nature of the current tax is directly contradictory to the goal of progressivity. So although on the surface it appears that the tax satisfies the vertical equity condition, it really C H A P T E R 7 lower income levels reducing the does this only at the wealth of these lowest income taxpayers, not the intended consequence.
S O U T H C A R O L I N A S
Figure 5.5: A X I N C E N T I Vtax:SCurrent taxT L Ycompared to T South Carolina income E : C O S rates , inflation-indexed rates, 2009 INEFFICIENT AND DISTORTIONARY
Income Tax Rates/Brackets if 1959 Tax Current Income Tax Schedule was Inflation Adjusted to by Peter T. Calcagno and Frank Hefner Rates/Brackets 2009 Taxable Income $5,000 $10,000 $15,000 $20,000 $30,000 $50,000 $75,000 $100,000 $150,000 $200,000 Tax Amount $71 $290 $604 $954 $1,654 $3,054 $4,804 $6,554 $10,054 $13,554 Average Tax Rate 1.42% 2.90% 4.03% 4.77% 5.51% 6.10% 6.41% 6.56% 6.70% 6.77% Tax Amount $125 $250 $377 $527 $834 $1,695 $3,127 $4,877 $8,377 $11,877 Average Tax Rate 2.5% 2.5% 2.51% 2.63% 2.78% 3.39% 4.17% 4.88% 5.58% 5.94%
Figure 5.5 also shows what the average tax rates are for various incomes and taxes under the current tax system in South Carolina. In the right columns it also shows what the taxes and average tax rates would be if the 1959 tax tables were indexed for inflation. The figure clearly shows that the 1959 indexed tax rate structure is more uniformly progressive, especially at higher levels of incomes. It keeps tax rates extremely low for the lowest income individuals in the state. Figure 5.5 also shows that the current tax system charges all income groups more in taxes than an indexed rate schedule. The only exception is the $5,000 income earner in the table. As South Carolina income taxes continue to climb while the tax brackets remain stagnant, the state becomes a relatively high-tax state. This has a negative impact on
130 18 18
UUNLEASHING CAPITALISM NLEASHING CAPITALISM
manufacturing property tax inin the country. In Figure 5.8 we present the effective property tax manufacturing property tax the country. In Figure 5.8 we present the effective property tax rates data for Southeastern states, for comparison. The ranks given for the states are out of all rates data for Southeastern states, for comparison. The ranks given for the states are out of all 50 states. The net tax and effective tax rate are calculated based on property valued atat $25 50 states. The net tax and effective tax rate are calculated based on property valued $25 million ($12.5 million ininmachinery and equipment, $12.5 million inininventories, and $2.5 million ($12.5 million machinery and equipment, $12.5 million inventories, and $2.5 million inin fixtures). Notice that South Carolinas effective tax rate on industrial property is million fixtures). Notice that South Carolinas effective tax rate on industrial property is over 7.8 times higher than the most industry-friendly state, Delaware. (Delaware isis listed in over 7.8 times higher than the most industry-friendly state, Delaware. (Delaware listed in the figure because it it is the lowest-tax state.) the figure because is the lowest-tax state.)
Figure 5.8: Industrial Property Taxes in Southeastern states*, 2007 Figure 5.8: Industrial Property Taxes in Southeastern states*, 2007
State Rank (of 50) State Rank (of 50) South Carolina 11 South Carolina Mississippi Mississippi Texas Texas Tennessee Tennessee West Virginia West Virginia Louisiana Louisiana Georgia Georgia Florida Florida Alabama Alabama North Carolina North Carolina Kentucky Kentucky Virginia Virginia Delaware Delaware 44 66 10 10 14 14 17 17 20 20 24 24 35 35 37 37 47 47 49 49 50 50 Net Tax Net Tax $1,864,900 $1,864,900 $1,291,050 $1,291,050 $1,264,358 $1,264,358 $1,033,544 $1,033,544 $833,234 $833,234 $783,407 $783,407 $760,381 $760,381 $677,683 $677,683 $533,776 $533,776 $491,071 $491,071 $327,100 $327,100 $241,498 $241,498 $238,840 $238,840 Effective Tax Rate Effective Tax Rate 3.73% 3.73% 2.58% 2.58% 2.53% 2.53% 2.07% 2.07% 1.67% 1.67% 1.57% 1.57% 1.52% 1.52% 1.36% 1.36% 1.11% 1.11% 0.98% 0.98% 0.65% 0.65% 0.48% 0.48% 0.48% 0.48%
Source: National Association ofof Manufacturers (2009) Source: National Association Manufacturers (2009) * Taxes measured inin the states largest city only. * Taxes measured the states largest city only.
Importantly, South Carolinas effective tax rate isisalmost 2.5 times greater than Importantly, South Carolinas effective tax rate almost 2.5 times greater than Georgias tax, and almost 4 4 times greater than North Carolinas. This puts South Carolina at a Georgias tax, and almost times greater than North Carolinas. This puts South Carolina at a serious disadvantage, inin terms of its ability to attract and keep industry. Since South Carolina serious disadvantage, terms of its ability to attract and keep industry. Since South Carolina has the highest tax inin the country on industrial property, it should be no surprise that it has has the highest tax the country on industrial property, it should be no surprise that it has one of the lowest per capita incomes and economic growth rates inin the country. one of the lowest per capita incomes and economic growth rates the country. Although it it is probably not critical that South Carolina set its tax rate to the lowest in Although is probably not critical that South Carolina set its tax rate to the lowest in the country, it itshould definitely make it itatatleast competitive for the Southeast. Since the country, should definitely make least competitive for the Southeast. Since Georgias rate isis effectively 1.52 percent and North Carolinas is just under 1 percent, a rate effectively 1.52 percent and North Carolinas is just under 1 percent, a rate Georgias rate atataround 1 1percent might be sufficient totoattract more industry. Working to reduce the around percent might be sufficient attract more industry. Working to reduce the various taxes applied toto industry would seriously improve the states competitiveness. various taxes applied industry would seriously improve the states competitiveness. Such a a significant reduction in taxes on industrial property would obviously lead to a Such significant reduction in taxes on industrial property would obviously lead to a reduction inintax revenues on industrial property, atatleast initially. However, the overall reduction tax revenues on industrial property, least initially. However, the overall revenue may ininfact increase once the growth rate inin the state begins to pick up andmore revenue may fact increase once the growth rate the state begins to pick up and more industry moves into the state. Furthermore, ifif the official tax rates are lowered, then the state industry moves into the state. Furthermore, the official tax rates are lowered, then the state
CHAPTER 5: SPECIFIC TAX REFORMS
131 13
Presumably the original intent of imposing a tax rate schedule with graduated marginal tax rates was to make the income tax progressive. However, what progressivity exists in the states income tax structure is due to the zero tax on the first $2,630 of income, and because of the graduated marginal tax rates. However, since the marginal tax rate increases over such small steps in income, as shown in Figure 5.5, most of the progressivity occurs at lower income levels, not higher levels of income. At higher income levels, the average tax rate hardly increases at all. This nature of the current tax is directly contradictory to the goal of progressivity. So although on the surface it appears that the tax satisfies the vertical equity condition, it really does this only at the lower income levels reducing the wealth of these lowest income taxpayers, not the intended consequence.
SOUTH CAROLINAS TAX INCENTIVES: COSTLY, INEFFICIENT AND Figure 5.5: South Carolina income tax: Current tax rates compared to DISTORTIONARY
inflation-indexed rates, 2009
Peter T. Calcagno and Frank Hefner
Current Income Tax Rates/Brackets Income Tax Rates/Brackets if 1959 Tax Schedule was Inflation Adjusted to 2009
Tax Tax Average Tax Rate Average Tax Rate Taxable Income Amount Amount The government of South Carolina uses industry targeting or targeted tax incentives in an attempt to create jobs and stimulate economic growth. Targeted tax2.5% incentives, which $5,000 $71 $125 1.42% include: job development and retraining tax credits, tax abatements, infrastructure financing $10,000 $290 $250 or, in some cases, outright grants and 2.90% public funds, are fiscal tools2.5% loans of designed to attract $15,000 $377 2.51% a private firm to a new$604 location, help 4.03% or expand an existing business, or to prevent a support company from relocating to another 4.77% state. In$527 Carolina these programs range city or South $20,000 $954 2.63% from tax credits for locating or expanding corporate headquarters, to subsidies for the motion $30,000 $1,654 $834 2.78% picture industry. While these policies5.51% are common among state governments, the efficacy of $50,000 $3,054 6.10% these policies has been called into question over and $1,695 over again by many 3.39% and policy scholars makers. $75,000 $4,804 $3,127 6.41% 4.17% As noted in Chapter 3, a low-rate tax structure that is broad based is conducive to $100,000 $6,554 $4,877 6.56% 4.88% economic growth, selective tax incentives are quite a different matter. They are tools of $150,000 $10,054 5.58% central economic planning and much6.70% policy$8,377 like tax in general often create distortions that affect $200,000 relative prices and profits. In addition, they may create the type of deadweight cost (see $13,554 $11,877 6.77% 5.94% Chapter 4) that destroys wealth by encouraging firms to shift resources into areas that receive these preferential government favors. Figure 5.5 also shows what the average tax rates are for various incomes and taxes The purpose of this chapter is Carolina. In reader with a better understanding of the under the current tax system in Southto provide thethe right columns it also shows what the role targeted tax incentives may play in state and local economic development. We begin by taxes and average tax rates would be if the 1959 tax tables were indexed for inflation. The discussing the distortions that these policies create drawing upon the literature on taxes figure clearly shows that the 1959 indexed tax rate structure is more uniformly progressive, (public finance). From there we examine the efficacy of targeted tax incentives, income especially at higher levels of incomes. It keeps tax rates extremely low for the lowestfocusing specifically on the political factors that explain their popularity. We then present a summary individuals in the state. of the findings of scholarly research addressing the impacts targeted tax incentives have on Figure 5.5 also shows that the current tax system charges all income groups more in the areas of employment, income and growth. taxes than an indexed rate schedule. The only exception is the $5,000 income earner in the Then we detail some of the specific cases of South Carolinas experiences with table. As South Carolina income taxes continue to climb while the tax brackets remain incentives. We end by concluding that the evidence suggests that South Carolinas prosperity stagnant, the state becomes a relatively high-tax state. This has a negative impact on would be enhanced by abandoning its industry targeting approach (and dissolving the economic development agencies that offer them) in favor of broad-based tax cuts and other 3
132 UNLEASHING CAPITALISM 18 4 18
manufacturing property taxbenefit country. In Figure 5.8 we presentfew favored companiestax pro-growth initiatives thattax in the country.in general rather than a the effective property or manufacturing property in the business In Figure 5.8 we present the effective property tax rates data for Southeasternthat South comparison. The ranks given forbythe states aremarketindustries. We Southeastern states, forCarolina would be better off for promoting out of all rates data for maintain states, for comparison. The ranks given the states are out of all 50 states. policies that provide a beneficial rate are calculated based on property valued at $25 friendly The net tax and effective tax rate are calculatedfor all firms and not a business50 states. The net tax and effective tax business climate based on property valued at $25 million ($12.5 million ininmachinery and equipment, $12.5 million inininventories, and $2.5 friendly policy for a few firms. million ($12.5 million machinery and equipment, $12.5 million inventories, and $2.5 million inin fixtures). Notice that South Carolinas effective tax rate on industrial property is million fixtures). Notice that South Carolinas effective tax rate on industrial property is over 7.8 times higher than the most industry-friendly state, Delaware. (Delaware isis listed in over 7.8 times higher than the most industry-friendly state, Delaware. (Delaware listed in Sthe figure because it is the lowest-tax state.) DISTORTIONS IN MARKETS ELECTIVE I it is the lowest-tax state.) the figure becauseNCENTIVES CREATE Recall from Chapter 4 that when taxes are imposed on consumers or businesses the tax burden can be shifted back to businesses, or on to consumers, respectively. For example, a Figure 5.8: Industrial Property Taxes in Southeastern one percent2007 Figure City Federal Reserve Report Taxes from 1992-2005 a states*, 2007 recent Kansas5.8: Industrial Propertyfinds that in Southeastern states*, increase State Net Tax Effective Tax Rate Rank (of 50) Net Tax Effective percent. in the stateState corporate Rankrate 50) tax (of decreases the wages of employees by .52Tax Rate 1 Further, remember Carolina taxation1process creates$1,864,900 indirect costs and behavioral changes that can South that the 3.73% South Carolina 1 $1,864,900 3.73% result in deadweight cost or excess burden of taxation. Similarly, when state governments, 44 $1,291,050 Mississippi 2.58% such MississippiCarolina offer businesses tax$1,291,050 subsidies it2.58%create an excess as South credits or can Texas 66 $1,264,358 Texas $1,264,358 2.53% burden or an inefficiency that creates a wedge between the price 2.53% consumers pay and the priceTennessee receive. This type of wedge$1,033,544 businesses creates a distortion in the market by redirecting 10 $1,033,544 2.07% 2.07% Tennessee 10 resources into a specific industry. For instance, a business interested in locating to South West Virginia 14 $833,234 1.67% West Virginia $833,234 1.67% Carolina may request or be14 offered a tax credit in return for locating to the state. This Louisiana 17 1.57% Louisiana 17 $783,407 negotiation process is similar to the lobbying$783,407 efforts noted in earlier 1.57% efforts that chapters create Georgia indirect costs that can offset the benefits of the tax credit or subsidy. additional Georgia 20 $760,381 1.52% 20 $760,381 1.52% The process of receiving the tax credit lowers the cost for the specific business for Florida 24 $677,683 1.36% 1.36% Florida 24 $677,683 which the credit applies. This encourages greater production of this product by this business 1.11%market forces. In 35in $533,776 Alabama than Alabama would otherwise occur 35 South Carolina$533,776 purely by 1.11% if directed free addition, theCarolina of the37 credit may be $491,071 tax shifted from the targeted0.98% businesses to existing North Carolina 0.98% 37 $491,071 North benefits businesses, employees, or consumers, which again can distort the behavior of consumers, or 0.65% Kentucky 47 $327,100 Kentucky 47 $327,100 0.65% production of other business. The same analysis applies if specific firms are offered Virginia 49 0.48% Virginia 49 $241,498 subsidies.2 While these types of selective or $241,498incentives seem0.48% targeted to benefit businesses and consumers, they instead 50 create distortions $238,840 us to ask how else these resources that require Delaware 50 0.48% Delaware $238,840 0.48% wouldSource:National Association ofof Manufacturers (2009) tax credit or subsidy had not been offered have been allocated in South Carolina if the Source: National Association Manufacturers (2009) * Taxes measured in the states largest city only. to theseTaxes measured in the states largest place. * specific businesses in the first city only. As was discussed in Chapter 5, South Carolina has embedded in its constitution Importantly, South Carolinas discriminatetaxrate isvarious classes timesgreater than rate almost 2.5 of greater In property Importantly, South Carolinaseffective taxamong isalmost 2.5 times properties. than tax assessment ratios which effective Georgiasrectifyand almost assessment on than North property inThis puts South Carolinathe a Georgias tax, the high times greater than North Carolinas. the state, and attract a order to tax, and almost 4 4 times greater industrialCarolinas. This puts South Carolina atat serious disadvantage, inin terms of ofability to attract and keep industry. Since South Carolina serious disadvantage, terms of its ability to attract was passed in 1987. This incentive is a manufacturing sector, a fee-in-lieu its tax (FILOT) law and keep industry. Since South Carolina has the highest tax inin andcountry onaindustrial property, it state or countysurprise that it it has has the highest tax the country industrial rate with should be no surprise Between discretionary incentivethe the fee ison negotiated property, it should be no officials. that has one ofand lowest 320 capita incomes and economic growth rates inin the country. applied to one the 2000, per capita agreements were negotiated. The the country. 1987 of the lowest perFILOT incomes and economic growth3 rates original FILOT Although it isis probably a minimum requiredCarolina set its $85 rate toto Since then relativelyAlthough it plants with not critical that South investment ofits taxmillion. the lowest in large new probably not critical that South Carolina set tax rate the lowest in the threshold it itshould progressively reduced, least competitive for thetheSoutheast. toSince thecountry, has shoulddefinitely make it itatat from $45 million in theearly 1990s Since country, least competitive for Southeast. $5 been definitely make Georgias rate isis $1 million1.52 percent select North Carolinas is just under 1 percent, a $1 effectively in 1999 for and North Carolinas is just underFILOT with rate 1 percent, a rate Georgias rate million in 1995 to effectively 1.52 percent and counties. To qualify for the atataround 1 1percentthemightbe sufficient totoattract more industry. Workinghas an average around percent new be sufficient attract more in a county that to reduce the million investment, might industry must locate or expand industry. Workingto reduce the various unemployment to industry wouldtwice theimprove the states competitiveness. last two taxes applied to industry would seriously improve the states competitiveness. various taxes applied rate of at least seriously state average during each of the annual Such a a significant reduction in taxes on industrial property would obviously lead to a Such significant reduction in taxes on industrial property would obviously lead to a 1 reduction inintax revenues on industrial property, atatleast initially. However, the overall reduction tax revenues on industrial property, least initially. However, the overall Felix (2009) 2 While both tax in factincrease oncecreate growth rate in the state begins to pick up and more credits and subsidies the distortionsratethe allocation of resources pickconsumers more in in the state begins to for up and and revenue may in fact increase once the growth revenue may businesses, they are different. A tax credit is offset ifif the official tax and reduces a businesss tax burden industry moves into the state. Furthermore, against taxable income rates are lowered, then the state industry moves into the state. Furthermore, the official tax rates are lowered, then the state
while a subsidy is a direct payment by the government to the business. 3 Woodward, Miley, and Ulbrich (2000).
Chapter CHAPTER 5: arolinas TAX REFORMS 7: south C SPECIFIC 7 ax inCentives CHAPTER t
133 13 5
Presumably the original intent number of a tax rate schedule with graduated completed calendar years. The law has aof imposingother provisions. One does not need to marginal the details was to make the income tax progressive. However, what progressivity examine tax rates in order to observe that this incentive is clearly a second best solution to exists in the states income in the constitution. As the zero tax onsolution it has a of income, the property tax provision tax structure is due to a second best the first $2,630 number of and because of the graduated marginal tax rates. However, sincea the marginal tax rate unsatisfactory results: not every new industry qualifies, the fee is negotiated fee which increases over such small steps in income, as shown in Figurepolitical preferences, existing means it is unpredictable and subject to being tainted by 5.5, most of the progressivity occurs at continue to pay their taxeshigher on the mandated assessment ratios; thus, shifting industries lower income levels, not based levels of income. At higher income levels, the average taxof taxes from new firms to existing firms. the current tax is directly contradictory the burden rate hardly increases at all. This nature of to the goal of progressivity. So although on the surface it appears that the tax satisfies the vertical equity condition, TAX INCENTIVES at the lower income levels reducing the THE EFFICACY OF it really does this only wealth of these lowest income taxpayers, not the intended consequence. Economists and policy makers have argued that competition among states to entice Figure through selective incentives provides no Current tax rates compared the companies5.5: South Carolina income tax:net gain to the U.S. economy. From to states' point of view each may appear better off competing for particular businesses, but the inflation-indexed rates, 2009 overall economy ends up with less of both private and public goods than if such competition was prohibited.4 So what effects do these policies have on a state's economic growth? Income Tax Rates/Brackets if 1959 Tax Several of the Federal Reserve District Banks have published articles investigating the Current Income Tax 5 role of tax incentives on state economic growth. TheSchedule wasthese studies suggests that evidence in Inflation Adjusted to Rates/Brackets 2009 state governments should eliminate, abolish or refine tax incentives policy and thereby remove the competition Tax is occurring between statesTax investment. that for Average Tax Rate Taxable Income of state governments targeting industries through financial incentives The subject Amount Average Tax Rate Amount raises important questions regarding economic growth and development, which requires us to $5,000 $71 $125 1.42% 2.5% examine whether the economic benefits of these policies are worth the economic costs. $10,000 $290 $250 2.90% 2.5% Whether or not state development incentives lead to real job creation and economic growth has been the subject $604 of much debate among economic scholars. There is a breadth of $15,000 $377 4.03% 2.51% economics literature that has examined a variety of programs across the United States at both $20,000 $954 $527 4.77% 2.63% the state and local level. These studies suggest that economists have long doubted the efficacy $30,000 $1,654 5.51% of using state inducements to attract mobile firms.6 $834 Economists have 2.78% the evidence found associated with the issue of tax and other development incentives generating economic $50,000 $3,054 $1,695 6.10% 3.39% growth unconvincing.7 $75,000 $4,804 $3,127 6.41% 4.17% Selective incentives include direct economic incentives as well as tax abatements, and $100,000 $6,554 $4,877 6.56% 4.88% are broken down by the National Association of State Development Agencies into several categories: industry grants, loan guarantees, industrial development bonds and guarantees, $8,377 $150,000 $10,054 6.70% 5.58% umbrella bonds, general obligation bonds, customized industrial training, state funded venture $200,000 $13,554 $11,877 6.77% 5.94% capital corporations, privately sponsored development credit corporations, and other financing programs. Figure 5.5 alsoof these what the average taxhave one major goal, incomes and create Ultimately all shows selective incentives rates are for various which is to taxes underin the state. tax systemKraybill (1998) in a studyright columns it which firms what the jobs the current Gabe and in South Carolina. In the that examines also shows in Ohio taxes and average tax rates would be if the 1959 tax tables were indexed for inflation. The 4 figure clearlyRolnick (1995, the7). Mauey and Spiegelrate structure is more uniformly progressive, Burstein and shows that p 1959 indexed tax (1995) and Bartik (2002) question whether benefits especially at higherBartik (1994) argues that keeps tax rates extremely low for the lowest income outweigh these costs. levels of incomes. It development incentives provide the greatest benefit to high unemployment the However, he notes that state governments often attract firms to areas that have low individuals inareas.state. unemployment, limiting theshows that thestate may tax system charges all of incentives. Calcagno and Figure 5.5 also benefits that a current receive from these types income groups more in Thompson (2004) find that selective incentives merely reallocate resources rather than generate real economic taxes than an indexed rate schedule. The only exception is the $5,000 income earner in the growth. 5 table. As South Carolina income Bank publications include: Mauey and the tax(1995), Burstein and taxes continue to climb while Spiegel brackets remain Articles from regional Federal Reserve stagnant, the Cunningham (1995),aand Becsi (1996) state becomes relatively high-tax state. This has a negative impact on Rolnick (1995),
6 7
Esinger (1989) Buss (1999a, 1999b, 2001)
manufacturing property tax inin thethat the In Figure of5.8 we jobs promised by the targeted receive selectiveproperty tax find country. number 5.8new present the effective property tax manufacturing incentives the country. In Figure we present the effective property tax rates datais for Southeastern states, for comparison. The ranks given forExaminingare out2000 business for Southeastern states, for comparison. The ranks incentive. the states are out of all rates data the major factor in deciding who receives the given for the states over of all 50 states. The net tax and effective taxfinds are evidence of based ongrowth invalued gross programs across all tax and effective tax rate are calculated overall property valued atat $25 50 states. The net states Saiz (2001) rate no calculated based on property state $25 million ($12.5 million ininmachinery and asequipment,$12.5 million inininventories, and finds domestic ($12.5 million using financial inventories, and $2.5 million product or employment levels equipment, of $12.5 million incentives and $2.5 machinery and a result million inin fixtures). certainthat South Carolinas recent studies, rate on industrial property is negative impacts in Notice industries. In more effective tax rate on industrial property to million fixtures). Notice that South Carolinas effective tax the evidence continues is over 7.8 that these policiesthe most industry-friendly state, Delaware.economic growth andin suggest times higher than are mosteffective in generating jobs or (Delaware isis listed over 7.8 times higher than the not industry-friendly state, Delaware. (Delaware listed in the figure because it it is the lowest-tax state.) development. The effects across Kentucky counties were analyzed in a 2008 report of state the figure because is the lowest-tax state.) government incentives to attract businesses. The authors examined the actual incentives claimed by these businesses and found that there were weak positive effects associated with taxFigure 5.8: Industrial Property Taxes in Southeastern states*, effects in incentives, but only in border counties and found no evidence of states*, 2007 Figure 5.8: Industrial Property Taxes in Southeasternspillover 2007 adjacent counties. The authors argue that since Kentuckys incentive packages are similar to State Rank (of 50) Net Tax states.8 Figure Effective Tax Rate Effective Tax Ratesummary of Rank (of applied toNet Tax most states,State findings can be50) their other 7.1, provides a South Carolina has 1 1 $1,864,900 3.73% South Carolina $1,864,900 3.73% the literature, which consistently found that selective incentives have little effect anywhere in the United States. Similarly Peters and Fisher (2004, 2.58% using a metap 35), Mississippi 44 $1,291,050 2.58% Mississippi $1,291,050 analysis, of the most commonly cited reviews of this literature arrive at the same conclusion. 2.53% 66 Texas $1,264,358 2.53% TheyTexas conclude that the most fundamental $1,264,358 that many public officials appear to problem is Tennessee 10 2.07% 2.07% Tennessee 10 $1,033,544 believe that they can influence the course of $1,033,544or local economies through incentives their state and West Virginia a degree14 beyond anything supported by even the most optimistic subsidies to far $833,234 1.67% West Virginia 14 $833,234 1.67% evidence.9 Louisiana 17 $783,407 1.57% Louisiana 17 $783,407 1.57% Georgia Georgia Florida Florida Alabama Alabama North Carolina North Carolina Kentucky Kentucky Virginia Virginia Delaware Delaware 20 20 24 24 35 35 37 37 47 47 49 49 50 50 $760,381 $760,381 $677,683 $677,683 $533,776 $533,776 $491,071 $491,071 $327,100 $327,100 $241,498 $241,498 $238,840 $238,840 1.52% 1.52% 1.36% 1.36% 1.11% 1.11% 0.98% 0.98% 0.65% 0.65% 0.48% 0.48% 0.48% 0.48%
Importantly, South Carolinas effective tax rate isisalmost 2.5 times greater than Importantly, South Carolinas effective tax rate almost 2.5 times greater than Georgias tax, and almost 4 4 times greater than North Carolinas. This puts South Carolina at a Georgias tax, and almost times greater than North Carolinas. This puts South Carolina at a serious disadvantage, inin terms of its ability to attract and keep industry. Since South Carolina serious disadvantage, terms of its ability to attract and keep industry. Since South Carolina has the highest tax inin the country on industrial property, it should be no surprise that it has has the highest tax the country on industrial property, it should be no surprise that it has one of the lowest per capita incomes and economic growth rates inin the country. one of the lowest per capita incomes and economic growth rates the country. Although it it is probably not critical that South Carolina set its tax rate to the lowest in Although is probably not critical that South Carolina set its tax rate to the lowest in the country, it itshould definitely make it itatatleast competitive for the Southeast. Since the country, should definitely make least competitive for the Southeast. Since Georgias rate isis effectively 1.52 percent and North Carolinas is just under 1 percent, a rate effectively 1.52 percent and North Carolinas is just under 1 percent, a rate Georgias rate atataround 1 1percent might be sufficient totoattract more industry. Working to reduce the around percent might be sufficient attract more industry. Working to reduce the various taxes applied toto industry would seriously improve the states competitiveness. various taxes applied industry would seriously improve the states competitiveness. Such a a significant reduction in taxes on industrial property would obviously lead to a Such significant reduction in taxes on industrial property would obviously lead to a reduction inintax revenues on industrial property, atatleast initially. However, the overall reduction tax revenues on industrial property, least initially. However, the overall 8 Hoyt et al. may in factincrease once the growth rate in the state begins to pick up and more (2008) fact increase once the growth rate in the state begins to pick up and more revenue may in revenue 9 Peters and moves(2004)the state. Furthermore,the results of various papers onlowered, then the state industry moves into the state. Furthermore, ifif the official tax rates are a topic are then the state industry Fisher into a meta-analysis is where the official tax rates are lowered, examined and
summarized using a variety of statistical techniques to test whether the overall findings are statistically significant.
135 13 7
Presumably 7.1: original intent of imposing a tax rate schedule with graduated Figure the Empirical Studies of Tax Incentive Efficacy marginal tax rates was to make the income tax progressive. However, what progressivity Study Region/Time Findings exists in the states income tax structure is due to the zero tax on the first $2,630 of income, Ambrosius (1989) National study of No evidence since the marginal and because of the graduated marginal tax rates. However,of incentive impact on tax rate development incentives, as shown in Figure 5.5, most of the unemployment, manufacturing value-added or progressivity increases over such small steps in income, 19691985 occurs at lower income levels, not higher levels thusincome. At that tax incentives were the of suggesting higher income levels, ineffective. average tax rate hardly increases at all. This nature of the current tax is directly contradictory Trogan (1999) National study of state General fiscal policy found tax satisfies to the goal of progressivity. So although on the surface it appears that the to be mildly the economic really and vertical equity condition, it growth does this onlyeffective, while income levels reducing the at the lower targeted incentives reduced wealth of these lowest income taxpayers, not the intended consequence. (as measured by per development programs, economic performance
19791995 capita income).
Figure Gabe and 5.5: Kraybill (2002)

Fox and Murray (2004)
South Carolina income tax: Current tax employment by businesses 366 Ohio firms, 19931995 Small reduction in rates compared to inflation-indexed which received Ohios tax incentives. rates, 2009
Panel study of impacts of No evidence of large firm impacts on local entry by 109 large firms in economy.Tax Rates/Brackets if 1959 Tax Income Current Income Tax the 1980s Schedule was Inflation Adjusted to Rates/Brackets Edmiston (2004) Panel study of large firm Employment impact of large firms is less than 2009 entrance in Georgia, gross job creation Average Tax Rate thus (by about 70%), and Tax Tax Taxable Income19841998 Average Tax Rate tax incentives are unlikely to be efficacious. Amount Amount Hicks (2004)
$5,000
$10,000 $15,000 $20,000 $30,000
Panel study of gaming $290 2.90% casinos in 15 counties $604 4.03% (matched to 15 non-gambling counties) $954 4.77%
$71
1.42%
No employment or income impacts associated $250 2.5% with the opening of a large gambling facility. $377 2.51% There is significant employment adjustment across industries. $527 2.63%
$125
2.5%
$1,654
5.51%
$834
2.78%
LaFaive and $50,000 Hicks (2005)
$75,000 $100,000 $150,000

Hicks $200,000 (2007a)
Panel study of Michigans $3,054 6.10% MEGA tax incentives, $4,804 6.41% 19952004
$6,554 $10,054
6.56% 6.70%
Tax incentives had no impact on targeted $1,695 3.39% industries (wholesale and manufacturing), but 4.17% did$3,127 a transient increase in construction lead to employment at the cost 4.88% of roughly $125,000 $4,877 per job.
$8,377
5.58%
Panel study of Californias The receipt of a grant did increase the $13,554 $11,877 6.77% 5.94% EDA grants to Wal-Mart in likelihood that Wal-Mart would locate within a rates (about $1.2 million generated a 1% Figure 5.5 the 1990s what the average taxcountyare for various incomes and taxes also shows increase in columns it also county would under the current tax system in South Carolina. In the right the probability a shows what the taxes and average tax rates would be if the 1959 receive a new Wal-Mart), for inflation.no tax tables were indexed but this had The effect on retail employment overall. figure clearly shows that the 1959 indexed tax rate structure is more uniformly progressive,
especially at higher levels of incomes. It keeps tax rates extremely low for the lowest income individuals in the state. study of entry by large Hicks (2007b) Panel No permanent employment increase across a Figure 5.5 retailer (Cabelas) current tax quasi-experimental panel of groups more in also shows that the system charges all income all Cabelas stores taxes than an indexed rate schedule. The only exception is the 2003. income earner in the from 1998 to $5,000 table. Hicks South Carolina income taxes continue to climb while the tax brackets remain As and Shughart (2007). Source: stagnant, the state becomes a relatively high-tax state. This has a negative impact on
manufacturing property tax inin the that the In Figure that we present the effective property tax Buss (1999a, 2001) claims country. In Figure 5.8 we development agencies conduct manufacturing property tax the country. research 5.8 statepresent the effective property tax rates dataeconomic value and that for comparison. The ranks not meddle the states are location has little for Southeastern states, statecomparison. The ranks given for with privateout of all rates data for Southeastern states, for governments should given for the states are out of all 50 states. The net tax and effective (1999), the actual impact of on property valued atat $25 decisions. According to and effective tax rate are calculated based on property valued $25 50 states. The net tax Poole et al. tax rate are calculated based development strategies is million ($12.5 million ininmachinery and developers lack themillion inininventories, and $2.5 often unknown because these economic equipment, $12.5 necessary skills to identify the million ($12.5 million machinery and equipment, $12.5 million inventories, and $2.5 million inin method and have that South Carolinas effective tax rate often used by economicis appropriatefixtures). Notice that South Carolinas effective tool rate on industrial property is million fixtures). Notice limited data for analysis. The tax most on industrial property over 7.8 times higher than the most industry-friendly state, Delaware. (Delaware isis listed in development agencies isthan economic industry-friendly state, Delaware. (Delaware listed in over 7.8 times higher the the most impact study. the figure because it it is the lowest-tax state.) contain serious flaws. As a result, they may These economic impact studies often the figure because is the lowest-tax state.) overstate the employment and economic gains associated with a new or expanded plant. Several issues should be noted here, first there is no one accepted methodology for counting jobsFigure 5.8:While new jobs may be created byin Southeastern states*, 2007a and income. Industrial Property Taxes Southeastern states*, 2007 Figure 5.8: Industrial Property Taxes inthe targeted firm there is likely to be re-shuffling of the local labor force in an effort to fill the new jobs. In 2001, Nissan opened a Rank (of where 90 percent of the workers Effective Tax Rate worked Net Tax Effective Tax Rateand State Rank (of 50) Net Tax facility in State Canton, Mississippi, 50) employed lived South Carolina surrounding the plant (Peavy 2007). Thus, only 103.73% of the jobs at 11 $1,864,900 3.73% South Carolina $1,864,900 in the five counties percent the new Nissan plant were taken by individuals who either were previously unemployed prior Mississippi 44 $1,291,050 2.58% Mississippi $1,291,050 2.58% to opening the plant or moved to Madison County, Mississippi, from more distant locations, Texas 66 Texas $1,264,358 2.53% including out of state (Hicks and Shughart$1,264,358 is not known 2.53% the impact study 2007). It from Tennessee 10 $1,033,544 2.07% Tennessee 10 $1,033,544 whether the jobs that workers leave are filled, remain vacant, or are 2.07% eliminated when they move West Virginia openings. Further, the benefit of these jobs to the1.67%can be mitigated to the new job state West Virginia 14 $833,234 1.67% 14 $833,234 depending on whether labor migrates from out of state to fill these positions. Finally, the Louisiana 17 $783,407 1.57% Louisiana 17 $783,407 1.57% benefits of new jobs are subject to overstatement and double counting when indirect or ripple Georgia 20 $760,381 1.52% Georgia 20 $760,381 1.52% effects are evaluated. The indirect effects attempt to measure the economic benefits the new jobs Floridathroughout the economy. This concept will be explained in 1.36%detail in the case create more 24 $677,683 1.36% Florida 24 $677,683 study below. 1.11% Alabama 35 $533,776 Alabama 35 $533,776 1.11% Often firms that receive these selective incentives are subject to little or no North Carolina 37 $491,071 0.98% 37 0.98% North Carolina accountability and rarely create the number of $491,071the hourly wage rates they promise. jobs or These Kentucky often move47 operations elsewhere when the tax0.65% firms will incentives or subsidies Kentucky 47their $327,100 $327,100 0.65% cease to exist. In particular, call centers and high-tech companies that employ few Virginia 49 $241,498 0.48% 0.48% Virginia 49 $241,498 specialized physical assets will relocate because they can easily abandon one site in favor of Delaware $238,840 Delaware 50 $238,840 0.48% another in search of a larger50 more attractive incentive package (LeRoy0.48% 2005). Source: National Association ofof Manufacturers (2009) Source: Nationalselective incentives attract individuals from other states or cities to the When these Association Manufacturers (2009) * Taxes measured inin the states largest city only. * Taxes measured the states largest city only. local labor force, additional public services may be needed to accommodate them. If the new company in the area has been granted relief from state and local taxes, and the tax revenue Importantly, South Carolinas cover these additional costs, the 2.5 times government Importantly, South does not effective tax rate almost increased greater than generated from the new firm Carolinaseffective tax rate isisalmost 2.5 times greater than Georgiaswill fall onalmost existing greater than This tax shifting This puts South many jobs at a Georgias tax, and other times greater than North Carolinas. This puts South Carolina a spending tax, and almost 4 4 times businesses.North Carolinas. may destroy as Carolina atas serious disadvantage, inin termsfirm are intended to create. keep industry. Since South Carolina serious disadvantage, terms of its ability to attract and the incentives given to the newof its ability to attract and keep industry. Since South Carolina has the If highest tax in the country on these typesproperty, it shouldserious surprise that itthe highest tax in associated on industrial of policies is in be no doubt that it has has the the efficacy the countrywith industrial property, it should be no surprise it begs has one of thewhy they per capita incomes and economic growth rates in the goes back to Chapters one of the lowest are so popular with state governments? rates answercountry. question, lowest per capita incomes and economic growth The in the country. Although it is probably not critical employing resources set lobby for tax breaks and 3 and 4 Although it is probablybusinesses that South Carolina set its tax rate toto the lowest in and the discussion of not critical that South Carolina to its tax rate the lowest in the country, it that add to definitelymake it itatatlobbying often creates athe Southeast. Since the subsidies itshould definitely profits. This least competitive for bidding war between country, should owners make least competitive for the Southeast. Since other Georgias rate isis and or local1.52 percent and North increase theisvalue under 1incentivesathe effectively 1.52 percent andthat canCarolinas is just under 1 percent, a rate North Carolinas just of the percent, rate Georgias rate two or more state effectively governments atataround 1 1percent these government entities.attractmore industry. Working to reduce the firm around percentmight be sufficient totoattract more industry. Working to reduce the can extract from might be sufficient various Numerous studiesindustry would seriously improve the states competitiveness. taxes applied to industry would seriously improve the states competitiveness. various taxes applied to point out that there are clear political benefits for using selective Such a significant reduction inin taxes legislators, property would obviously lead to a financial Such a significant reductionmayors, on industrial and council members justify these a incentives.10 Governors, taxes on industrial property would obviously lead to reduction inintax revenues grounds that private-sector least initially.invest in a community reduction tax on the on industrial property, least initially. However, the overall public investments revenueson industrial property, atat decisions to However, the overall revenue may ininfact increase once the growth rate inin the state begins to pick up andmore revenue may fact increase once the growth rate the state begins to pick up and more industry moves into the state. Furthermore, ifif the official tax rates are lowered, then the state industry moves into the state. Furthermore, the official tax rates are lowered, then the state 10
See Bennett and DiLorenzo (1983), Esinger (1989), Buss (1999a, 2001), Ellis and Rogers (2000), Saiz (2001), and Calcagno and Hefner (2007).
137 13 9
Presumably the original intent that are essential to the schedule with graduated result in jobs, income, and tax revenues of imposing a tax rate economic and social wellmarginal a community or state (Poole et al. 1999, 1). HinkleyHowever, what progressivity being of tax rates was to make the income tax progressive. et al. (2000) claim that both exists in theand theincome tax structure is due to the zero tax on the first $2,630 of income, legislators states public are not provided with enough information from economic and because agenciesgraduated economic incentives offered andsincefor anmarginal in audits development of the about the marginal tax rates. However, call the increase tax rate increasesagencies. While severalin income, as shown that targeting has a political component of these over such small steps authors do concede in Figure 5.5, most of the progressivity occurs at lower income levels, not higher levels ofmay well be an inefficient allocationthe to it, they fail to recognize that targeting industries income. At higher income levels, of average tax rate hardly increases at all. This nature of the current tax is directly contradictory resources.11 to the goal of progressivity. So although on the surface it appears that the tax satisfies the Industries seeking preferential treatment dominate the political process because votervertical equity very little incentive to be this only at the lower incomeassociated with these taxpayers have condition, it really does well informed about the costs levels reducing the wealth of these lowest income create any means of organized opposition. The jobs created at tax incentive programs and to taxpayers, not the intended consequence. a new plant are easily visible to the state or local community; they will not see the jobs that are lost elsewhere in the Carolina income tax: tax burdenstax rates compared to Figure 5.5: South economy due to the higher Current imposed on other businesses and consumers. Nor do they see the scarce resources being allocated away from productive inflation-indexed rates, 2009 ventures that could produce real output and growth being spent instead on lobbying government officials to obtain these favors. In addition, taxpayers may be unable to see that their future tax bills will be higher in order to amortize andTax Rates/Brackets debt issued to Income service the public if 1959 Tax Current Income Tax finance the subsidies diverted toward the owners of politically was Inflation Adjusted to Schedule influential private companies (Hicks and Shughart 2007). Rates/Brackets 2009
WTaxable Income Amount AverageMPACTS OF TARGETED TAX HAT ARE THE ECONOMIC I Tax Rate Amount INCENTIVES? $5,000 $71 $125 1.42% 2.5%
Tax
Tax
Average Tax Rate
$10,000 $290 $250 2.90% 2.5% Although tax incentives have long been endorsedendorsed as the to prosperity,prosperity, Although tax incentives have long been as the highway highway to with promises $15,000 $604 $377 4.03% 2.51% with promises of attracting businesses, providing jobs and enriching thepublic most public of attracting businesses, providing jobs and enriching the state, most state, finance experts $954 2.63% consider experts consider them bad 4.77% It has $527 them finance$20,000bad policy. It has already been discussed how taxbeen discussed target specific policy. already incentives that how tax incentives create target specific companies create inequities, complications and tax companies that inequities, complications and inefficiencies. Further, 2.78% they shrink the $30,000 $1,654 $834 5.51% base, thus shifting the burden of the and reducing tax revenue available for and inefficiencies. Further, they shrink taxestax base, thus shifting the burden of taxesthe basic $50,000 $3,054 $1,695 6.10% 3.39% reducing tax state government. Finally, theres functions of state government. Finally, functions of revenue available for the basic little evidence that targeted incentives bring $3,127 6.41% 4.17% growth little evidence that targeted jobs, as demonstrated in the previous good Figure in the good theres $75,000form of$4,804 paying incentives bring growth in the form offigure. paying 7.2 jobs, as demonstratedcost per job to figure. Figure 7.2 reports the average various states that cost per reports the average in the previous 6.56% automobile factories to the 4.88% job to attract $100,000 $6,554 $4,877 offered incentives factories to the car companies. attract automobile to attract foreignvarious states that offered incentives to attract foreign $8,377 $150,000 $10,054 6.70% 5.58% car companies. $200,000 $13,554 $11,877 6.77% 5.94% Figure 5.5 also shows what the average tax rates are for various incomes and taxes under the current tax system in South Carolina. In the right columns it also shows what the taxes and average tax rates would be if the 1959 tax tables were indexed for inflation. The figure clearly shows that the 1959 indexed tax rate structure is more uniformly progressive, especially at higher levels of incomes. It keeps tax rates extremely low for the lowest income individuals in the state. Figure 5.5 also shows that the current tax system charges all income groups more in taxes than an indexed rate schedule. The only exception is the $5,000 income earner in the table. As South Carolina income taxes continue to climb while the tax brackets remain stagnant, the state becomes a relatively high-tax state. This has a negative impact on
11
See Dewar (1998), Buss (1999a 1999b), Wiewel (1999), and Finkle (1999).
manufacturing property tax inin theU.S. Auto Plant Investments* manufacturing property tax 7.2: country. In Figure 5.8 we present the effective property tax Figure the country. In Figure 5.8 we present the effective property tax rates data for Southeastern states, for comparison. The ranks given for the Initialare out of all states are out of all rates data for Southeastern states, for comparison. The ranks given for the statesEmployment Announced S State Announcement on property valued at $25 50 states. Company tax and effective tax rate are calculated based on property valued at $25 The net tax and effective tax rate are calculated based Date 50 states. The net Estimate Incentives million ($12.5 million ininmachinery and equipment, $12.5 million inininventories, and $2.5 million ($12.5 million machinery and equipment, $12.5 million inventories, and $2.5 Hyundai $1 million inin fixtures). Notice that Alabama tax property is million fixtures). Notice that South Carolinas effective2002 rate on industrial 2,000 South Carolinas effective tax rate on industrial property is over 7.8 times higher than the most industry-friendly state, Delaware. (Delaware isis listed in over 7.8 times higher than the most industry-friendly state, Delaware. (Delaware listed in the figure because it it is the lowest-tax state.) the figure because is the lowest-tax state.)
State Rank (of 50) State Rank (of 50) South Carolina 11 South Carolina Net Tax Net Tax $1,864,900 $1,864,900 Effective Tax Rate Effective Tax Rate 3.73% 3.73%
Mississippi 44 $1,291,050 2.58% Mississippi $1,291,050 2.58% 2.53% Texas 66 $1,264,358 Texas $1,264,358 2.53% In particular, the figure shows that cost$1,033,544 per job ranges from a low of $59,000 to a high Tennessee 10 $1,033,544 2.07% 2.07% Tennessee 10 of $192,730, interestingly enough the high and low both occur in Alabama. South Carolina is West Virginia 14 $833,234 1.67% 14 $833,234 1.67% in the West Virginia group with expenditures just over $81,000. As explained above, given middle of this Louisiana 17 Louisiana $783,407 1.57% the difficulties in accounting 17 new jobs and $783,407 for income using economic1.57% studies, and the impact general conclusion from the20 economic literature $760,381 that selective incentives have been shown to Georgia $760,381 1.52% Georgia 20 1.52% produce few if any benefits, it is not clear whether these firms are generating enough Florida 24 $677,683 1.36% 1.36% Florida 24 $677,683 economic benefit to cover the high costs per job. 1.11% Alabama 35the $533,776 Alabama To further examine 35 issue, Figure $533,776 7.3 presents the total1.11% economic incentives provided by Carolina Carolina state government from 1994-2007. Over this 14 year period North Carolina 37 $491,071 0.98% 37 $491,071 0.98% North the South state spending for incentives has increased from over $32 million in 1994 to over $250 0.65% Kentucky 47 $327,100 Kentucky 47 $327,100 0.65% million in 2007 almost an 8 fold increase. Most notably in 1999 and 2000 spending increased Virginia 49 $241,498 0.48% Virginia 49 $241,498 by large percentage changes, more than doubling the spending from0.48% of the previous each years, Delaware 101 and respectively. While $238,840 no statistically significant correlation appears Delaware 118 percent,50 $238,840 0.48% 50 0.48% to exist between spending onofeconomic incentives and employment, it is interesting to note Source: National Association of Manufacturers (2009) Source: National Association Manufacturers (2009) Taxes measured inin the states largest city increases in spending the percentage change in that *in Taxes years following these large only. * the measured the states largest city only. employment is negative. Thus, while spending in South Carolina on economic incentives Importantly, South Carolinas period, tax rate isis and personal times greater not. almost 2.5 income did than increasedImportantly,South Carolinas effective employment almost 2.5 times greater than substantially over a 13-year effective tax rate Georgias tax, and almost 4 4 times greater than North Carolinas. Thisjobs South Carolina atat a Georgias assurances of policy greater than North Carolinas. This puts South Carolina a Despite the tax, and almost timesmakers that incentives would create puts and higher income seriousneither has kept pace with theability to attract and keep industry. Since South Carolina serious disadvantage, terms of its ability to levels, disadvantage, inin terms of itsspending. attract and keep industry. Since South Carolina has the highest tax inin the country on industrial property, it should be no surprise that it has has the highest tax the country on industrial property, it should be no surprise that it has one of the lowest per capita incomes and economic growth rates inin the country. one of the lowest per capita incomes and economic growth rates the country. Although it it is probably not critical that South Carolina set its tax rate to the lowest in Although is probably not critical that South Carolina set its tax rate to the lowest in the country, it itshould definitely make it itatatleast competitive for the Southeast. Since the country, should definitely make least competitive for the Southeast. Since Georgias rate isis effectively 1.52 percent and North Carolinas is just under 1 percent, a rate effectively 1.52 percent and North Carolinas is just under 1 percent, a rate Georgias rate atataround 1 1percent might be sufficient totoattract more industry. Working to reduce the around percent might be sufficient attract more industry. Working to reduce the various taxes applied toto industry would seriously improve the states competitiveness. various taxes applied industry would seriously improve the states competitiveness. Such a a significant reduction in taxes on industrial property would obviously lead to a Such significant reduction in taxes on industrial property would obviously lead to a reduction inintax revenues on industrial property, atatleast initially. However, the overall reduction tax revenues on industrial property, least initially. However, the overall revenue may ininfact increase once the growth rate inin the state begins to pick up andmore revenue may fact increase once the growth rate the state begins to pick up and more industry moves into the state. Furthermore, ifif the official tax rates are lowered, then the state industry moves into the state. Furthermore, the official tax rates are lowered, then the state
139 13 11
State and Local s (Millions) 118
Presumably the Carolina Spending on tax rate schedule with with Figure 7.3: Southoriginal intent of imposing aIncentives Comparedgraduated marginal tax rates wasReal Incentive to make the income tax progressive. However, what progressivity Real Incentives Employment due Income tax on the exists in the states income tax structure isand to the zeroGrowth first $2,630 of income,
(2001 Million) Cost per Job Change Total graduated % % since in % Change in and because of the Economic marginal tax in Total However, Change the marginal tax rate rates. $118 Year over such small steps in income, as shown in Figure 5.5, most of thePersonal Income Incentives $59,000 Economic Incentives Employment increases progressivity 1994-1995 occurs at lower $32,262,687 income levels, not higher -levels of income. At higher income levels, the average tax rate hardly increases at all. This nature of the current1.8% is directly contradictory tax 1995-1996 $32,915,625 2.0% 4.9% to the goal of progressivity. So although 1.7% surface it appears that the tax satisfies the on the 1996-1997 $33,483,632 2.2% 4.6% vertical equity condition, it really does this only at the lower 3.7% income levels reducing the 1997-1998 $35,215,256 5.2% 5.6% wealth of these lowest income taxpayers, not the intended consequence. 1998-1999 $34,889,757 -0.9% 3.0% 4.1%
Figure 5.5: South Carolina income tax: Current tax rates compared to 2000-2001 $153,727,118 118.5% -0.9% 2.3% 2001-2002 $151,836,661inflation-indexed rates, 2009 -1.2% -2.3% 1.5%
2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 $152,138,291 $175,649,647 0.2% 15.4% 0.9% 0.2% 2.0% 4.6%
1999-2000
$70,340,202
101.6%
2.4%
5.9%
Current $182,636,009
$254,610,950
Income Tax 4.0% Rates/Brackets1.5% $185,439,957

37.3%
Income Tax Rates/Brackets if 1959 Tax 2.1% 4.5% Schedule was Inflation Adjusted to 2.1% 6.2% 2009 Tax Amount
2.4%
Tax Source: South Carolina Board of EconomicAverage Advisors Taxable Income Amount
Tax Rate
Average Tax Rate
3.5%
$5,000 $71 1.42% 2.5% EFFICACY OF TAX INCENTIVES FOR THE FILM$125 INDUSTRY: A CASE STUDY $10,000 $290 $250 2.90% 2.5% The film industry is very aggressive in seeking incentives from state governments and $15,000 $604 $377 4.03% 2.51% states seem eager to offer these incentives. As was mentioned in Chapter 6 on clusters, no $20,000 $954 $527 4.77% particular bias exists for or against this industry. The real question that 2.63% be asked is should what is so special about the film industry (or film $834 that warrants special types of cluster) $30,000 $1,654 5.51% 2.78% incentives. Then further, why not provide similar incentives to other industries? $50,000 $3,054 $1,695 6.10% 3.39% What makes the film industry special? The industry has a number of desirable $75,000 $4,804 $3,127 6.41% 4.17% features: creative, entertaining, environmentally clean, and so on. The answer perhaps was best summarized in a$6,554 Reserve Bank of Minneapolis publication: Call it a movie Federal $100,000 $4,877 6.56% 4.88% trailer for economic development: A film production company comes to town with its director $8,377 $150,000 $10,054 6.70% 5.58% and stars, spends a lot of money on lodging and food, hires locals as crew and extras. $200,000 $13,554 $11,877 6.77% Residents run into their favorite stars at the local coffee shop, and the 5.94% is seen by location millions of viewers on the big screen - a great boost for tourism.12 In an effort to capture this economic development,shows what the average tax rateshas afor various incomes and taxes Figure 5.5 also almost every state in the country are film office. More importantly, almostthe current tax system in South Carolina. In the right columns it also shows what the under every state offers a very favorable incentive package to the film industry. Figure 7.4 presents the selective rates would be if the states offer to the film industry. inflation. The taxes and average tax incentives that several 1959 tax tables were indexed forIndeed, if each state is attempting to create a competitive tax rate structure is more uniformly progressive, figure clearly shows that the 1959 indexedadvantage in the film industry and the tool is tax incentives, then there should be no surprise that each state ups the ante each time income especially at higher levels of incomes. It keeps tax rates extremely low for the lowest another state raises the stakes. individuals in the state. Since so many states are competing with each other for a limited numberFigure 5.5these type subsidies encourage a race-to-the bottomincome groups morethe of films, also shows that the current tax system charges all as each state raises in taxes than an indexed rate schedule. The only exception is the $5,000 income earner in the table. As South Carolina income taxes continue to climb while the tax brackets remain stagnant, the state becomes a relatively high-tax state. This has a negative impact on
12
Cobb, Kathy, Roll the credits and the tax incentives, Fedgazette, (Federal Reserve Bank of Minneapolis) Sept. 2006
manufacturing property tax inin the country. In Figure 5.8 we about Connecticutsproperty tax ante in their generosity. As one New York producer notedpresent the effective increase in manufacturing property tax the country. In Figure 5.8 we present the effective property tax rates subsidies: Southeastern states,that Connecticut could spur given forYork credit higher.13 their data for Southeastern news isfor comparison. The ranks givenNewthe states are out of all rates data for The good states, for comparison. The ranks the for the states are out of all 50 states. The net tax and effective tax rate are calculated based on property valued atat $25 50 states. The net tax and effective tax rate are calculated based on property valued $25 million ($12.5 million ininmachinery and equipment, $12.5 million inininventories, and $2.5 million ($12.5 million machinery and equipment, $12.5 million inventories, and $2.5 million inin fixtures). Notice that South Carolinas effective tax rate on industrial property is million fixtures). Notice that South Carolinas effective tax rate on industrial property is over 7.8 times higher than the most industry-friendly state, Delaware. (Delaware isis listed in over 7.8 times higher than the most industry-friendly state, Delaware. (Delaware listed in the figure because it it is the lowest-tax state.) the figure because is the lowest-tax state.)
13
Foderaro (2008).
Chapter CHAPTER 5: arolinas TAX REFORMS 7: south C SPECIFIC 7 ax inCentives CHAPTER t Presumably the original Film Industry Selected States Figure 7.4: Incentives for intent of imposing a tax rate schedule
141 13
with graduated marginal tax rates wasDescription of Incentive tax progressive. However, what progressivity to make the income State Alabama Exemptions on sales, use, and lodging the exists in the states income tax structure is due to taxes zero tax on the first $2,630 of income, Income tax and because of the graduated credit equal to 25 % rates. paid to Alabamasince the marginal tax rate marginal tax However, residents when expenses are 35 % payroll expenses rebate for salaries increases over such small steps in income, as shown in Figure 5.5, most of the progressivity between $500000 and $10 million. A levels, not higher levels production occurs at lower income 25-35 % credit or rebate for sound of income. At higher income levels, the average tax rate hardly The maximum atfor 2011. nature of at $5current tax is$7.5 million for 2010, increases amount of rebates is capped the million for 2009, directly contradictory all. This and $10 million to the goal of progressivity. So although on the surface it appears that the tax satisfies the Films, really does this only at the lower income levels a 15-22% vertical equity condition, itTV Commercials, and Music Videos of $625000 or more are eligible for reducing the Florida cash rebate wealth of these lowest income taxpayers, not the intended consequence.
Figure 5.5: South Carolina income tax: Current tax rates compared to inflation-indexed rates, 2009
Georgia
Multiple Commercials and Music Videos with $500000 or more in qualified expenditures are eligible for a 15-20% cash rebate Indie Films or Documentaries with qualified expenditures between $100000 and $625000 are eligible for a 15-17 % cash rebate. Digital Media projects of $300000 or more are qualified for a 10 % cash rebate All qualified productions are eligible for a sales tax exemption
Taxable Income
Kentucky
Average Tax Rate Amount sales tax incentive Refundable
Income Tax Rates/Brackets if 1959 Tax 30 % tax credit Current Income Tax An across the board flat tax credit of 20 % based on a minimum investment Adjusted to Schedule was Inflation of $500000. Rates/Brackets An additional 10 % Georgia Entertainment Promotion can be added by including an 2009 animated Georgia logo on approved projects. 8 % sales tax exemption. Tax Tax Average Tax Rate Amount
Refundable income tax credit up to 20 % of expenditures over $500000. $71 $125 1.42% 2.5%
$5,000 $10,000 $15,000

Maryland
Commercials can apply for the income tax credit, if they have expenditures over $200000. $290 $250 2.90% 2.5%
$604 $50000.
Documentaries and Broadway productions are eligible if they have expenditures over
4.03%
$377
2.51% 2.63% 2.78% 3.39%
$20,000 $30,000
$954rebate on in- state costs on a minimum of $500000. $527 4.77% 25 %

Exemptions items. $1,654 from state sales tax on qualified$834 5.51% 20 % rebate on spending in Mississippi $1,695 $3,054 6.10%
Mississippi $50,000
$75,000 $100,000 $150,000

North $200,000 Carolina South Carolina
$10,054
25 % rebate on salaries that are subject to Mississippi Income Tax withholding up to $1 $4,804 $3,127 6.41% 4.17% million. 20 % rebate on salaries not subject to Mississippi Income Tax withholding up to $1 $6,554 $4,877 6.56% 4.88% million. Exemption from the state's 7 % sales tax on some items and a reduction on others.
6.70%
$8,377
5.58%
25 % tax $13,554 credit on a minimum of $250,000 of in state spending. $11,877 6.77% 20% cash rebate for in-state employee wages
5.94%
Figure 5.5 also 10% cashwhat for out-of state employee wages (up to $3,500) shows rebate the average tax rates are for various incomes and taxes 20% cash rebate for Carolina. In the right columns it also performers under the current tax system in South salaries of out-of state performing artists, including stuntshows what the taxes and average tax ratescash rebatebe in-state supplies (if $1,000,000were indexed for inflation. The 30% would for if the 1959 tax tables spent) Sales and accommodations tax rate structure is over $250,000 figure clearly shows that the 1959 indexedtax exemptions if film budget ismore uniformly progressive, especially at higher levels of incomes. ItMotion Picture rates extremelycash rebate can be attained at keeps tax Opportunity Fund a low for the lowest income Through the Governor's Virginia individuals in the state. the discretion of the governor. Figure 5.5 also State salesthatand use exemptions andsystem charges all income groups more in shows tax the current tax state and local lodging tax exemptions. State owned property provided free taxes than an indexed rate rental of a 35000 square foot office buildingis Richmond. schedule. The only exception in the $5,000 income earner in the Free table. As South CarolinaOffices income taxes continue to climb while the tax brackets remain Source: Web pages of State Film stagnant, the state becomes a relatively high-tax state. This has a negative impact on
manufacturing property tax inin the country. In Figure 5.8of present the effective property tax In order to justify the country. In Figure 5.8 we present the studies property tax manufacturing property tax the incentives, a number we quantitative effective have been rates data for Southeasternuse regional comparison. The ranks given order states are out of soperformed. for Southeastern states, for economic impact models infor the to estimate out of all rates data These studies states, for comparison. The ranks given for the states are the all 50 states. The neteffect. and effective tax rate calculates the based on property valued at $25 $25 called multiplier tax and effective tax effectare calculated based on property valuedaatlocal 50 states. The net tax The multiplier rate are calculated additional impacts in million ($12.5 million ininmachinery and direct spending. For millioninininventories, and $2.5 economy ($12.5 million increase in local equipment, $12.5 million million caused by an machinery and equipment, $12.5 example, the money spent $2.5 inventories, and on million inin local restaurants that the film crew wouldeffective tax expenditure. The property isis food in thefixtures). Notice by South Carolinas effective tax rate on industrial salary paid million fixtures). Notice that South Carolinas be a direct rate on industrial property over 7.8 times higher than the most a industry-friendly state, Delaware. indirect expenditure.in toover employeeshigher restaurant as industry-friendlymeals is termed an (Delaware is listed the 7.8 times in the than the most result of these state, Delaware. (Delaware is listed in the figure because it it employees spendstate.) salary in the local economy on food, gasoline, When the restaurantisis the lowest-tax their the figure because the lowest-tax state.) clothing, and so on, they exert an induced impact. The multiplier attempts to measure the total of all of these impacts. The multiplier effects are often termed ripple effects, invoking an image of a rock tossed into a pond generatingTaxes across the water. A number of computer Figure 5.8: Industrial Property Taxes in Southeastern states*, 2007 Figure 5.8: Industrial Property ripples in Southeastern states*, 2007 models are available which allow researchers to localize economic impacts. One of the most State Net (Impact Analysis Effective Tax Rate IMPLAN Effective Tax Rate State Rank (of is Net Tax widely used softwareRank (of 50) IMPLAN, Tax models 50) for Planning).14 South Carolina 11 $1,864,900 3.73% South Carolina $1,864,900 3.73% calculates three kinds of multipliers: 1. Output: This measures the 4 activity that Mississippi 4 total economic$1,291,050 takes place within the economy. 2.58% Mississippi $1,291,050 2.58% 2. Income: This is commonly referred to as personal income and includes employee 2.53% Texas 66 $1,264,358 Texas $1,264,358 2.53% compensation and proprietors income.15 Tennessee 10 $1,033,544 2.07% 2.07% Tennessee 10 $1,033,544 3. Jobs: Total jobs measured as full time equivalents. In Virginia impact West 2008, a study conducted by Hefner examined the economic 1.67% of nine film and 14 $833,234 West Virginia 14 $833,234 1.67% television productions made in South Carolina in the years 2006 and 2007. The data were Louisiana 17 $783,407 1.57% Louisiana 17 $783,407 1.57% provided by the South Carolina Film Commission.16 South Carolina, like many other states, 20In $760,381 1.52% Georgia 1.52% pays Georgia film producers.20 fact, the South$760,381 Film Commission advertises on its cash to Carolina 17 web Florida South Carolina Pays Cash. At$677,683 these films were being made, South site that the time 24 1.36% 1.36% Florida 24 $677,683 Carolina was paying a 20 percent rebate on wages and a 30 percent rebate on qualified 1.11% Alabama 35 $533,776 Alabama 35 $533,776 1.11% spending. Slightly more than $8 million was paid to South Carolina residents by these nine North Carolina 37 $491,071 0.98% 37 $491,071 North Carolina productions (film and television). Salary rebates totaling $8.4 million 0.98%given to support were the $8 million in direct local salary. In terms of direct salary, this0.65% that the state means 0.65% Kentucky 47 $327,100 Kentucky 47 $327,100 government gave the film industry $1 in rebates to generate $0.95 in increased salary to South Virginia 49 $241,498 0.48% 0.48% Virginia 49 $241,498 Carolina residents. 18 The films spent $14,407,563 in South Carolina for supplies and services Delaware 50 $238,840 Delaware 50 $238,840 0.48% provided by local firms. These productions received $7,385,342 in 0.48% for supplies. In rebates Source: National Association Manufacturers (2009) effect,Source:National Association ofof Manufacturers a 50 percent subsidy for the in-state spending. the state of South Carolina paid about (2009) * Taxes measured inin the states largest city only. * Taxes measured the states largest favorable treatment possible to justify these subsidies, a In order to provide the most city only. multiplier analysis was also conducted. Total expenditures (salary, supplies and services) in Importantly, $22,546,211. Using effective tax rate economic impact within the than Importantly, South Carolinas IMPLAN, the total almost 2.5 times greater than South Carolina were South Carolinas effective tax rate isisalmost 2.5 times greater state Georgias tax, and almost 4 4 times greater than North Carolinas. This puts South Carolina at a Georgias tax, be almost times greater cash subsidies paid amounted to $15,815,028. Total was estimated toand $38,815,045.19 Total than North Carolinas. This puts South Carolina at a serious disadvantage, inin terms of its ability to attract and keep services, such South Carolina serious impact includes goods its ability to attract and keep industry. Since South Carolina economicdisadvantage, terms of such as lumber for set design, industry. Sinceas lodging and has leasing, and tax inin the country on to extras.property, it it economicno surprise that it it has has the highest tax the country on industrial property, should be no surprise that has car the highest income, such as salaryindustrial Of this total should be impact, labor income one of the lowest per capita incomes and economic growth rates inin the country. one of the lowest per capita incomes and economic growth rates the country. Although it it is probably not critical that South Carolina set its tax rate to the lowest in Although is probably not critical that South Carolina set its tax rate to the lowest in 14 the country, initially developed by the U.S. Department leastcompetitive for theandSoutheast.Since the country,it itshould definitely make it itatatleast competitive Service Southeast. Since should definitely make IMPLAN was of Agriculture Forest for the is now maintained and marketed by private firm (Minnesota IMPLAN Group, Inc.) . Georgias rateaisis effectively 1.52 percent and North Carolinas is just under 1 percent, a rate effectively 1.52 percent and North Carolinas is just under 1 percent, a rate Georgias rate 15 Employee compensation might besufficient to attract as benefits such Working toreduce the insurance, atataround 1 1percent might bewages and salaries attractmore industry. asWorkingtolifereducethe around percent includes sufficient to as well more industry. health and retirement and non-cash compensation. IMPLAN refers to this category as labor income. various taxes applied toto industry would seriously improve the states competitiveness. 16 various taxes applied industry would seriously improve the states competitiveness. http://www.sccommerce.com/docdirectory/ResearchFolder/Film%20Cost%20Benefit%20Analysis%202008% Such a a significant reduction in taxes on industrial property would obviously lead to a Such significant reduction in taxes on industrial property would obviously lead to a 20by%20Frank%20Hefner,%20College%20of%20Charleston.pdf 17 reduction inintax revenues on industrial property, atatleast initially. However, the overall reduction tax revenues on industrial property, least initially. However, the overall http://www.scfilmoffice.com 18 The rebates were applied increasepaid to non-South Carolina residents. In addition, to pick up also applied to salary once the growth rate in the state begins rebates were and more revenue may ininfact increase once the growth rate in the state begins to pick up and more revenue may fact toindustry on supplies the state. Furthermore, if the official tax rates are lowered, then the state spending moves into the state. Furthermore, state. industry moves intothat were purchased outside theif the official tax rates are lowered, then the state 19
Total economic impact is not the same thing as state income. The total impact includes all purchases, direct and ripple, and all employee compensation, direct and ripple.
143 13 15
Presumably the original intent of imposing a tax and perhaps with metric in amounted to $14,534,908. However, the most relevant measurerate schedulethe bestgraduated marginal tax rates was to make thespent to tax dollars received. This calculation is both the these cases is to compare tax dollars income tax progressive. However, what progressivity existsdifficult estimation and the one thatis due to mostzero tax onpublic finance implications. most in the states income tax structure has the the profound the first $2,630 of income, and because of the ensures an marginal tax rates. However, which is not always the case More importantly it graduated apples to apples comparison, since the marginal tax rate increases over such small steps inCarolina Tax Impact/Total Rebate most of the progressivity with multiplier effects. The South income, as shown in Figure 5.5, is $0.19. This means that occurs at tax dollar given in rebates, the return of income. At higher income from these for each lower income levels, not higher levels to the general revenue fund levels, the average tax rateonly $0.19. expenditures is hardly increases at all. This nature of the current tax is directly contradictory to the goal of progressivity. So although on the surface itindustry produces generates less in Thus after the film rebate, the services that the film appears that the tax satisfies the vertical equity condition, it really doesattractonly film industry. This creates a net loss to the tax revenue than the tax dollars spent to this the at the lower income levels reducing wealth of these lowestof $0.81 taxpayers, not the intendedThus, the tax subsidies as they were general revenue fund income for each tax dollar spent. consequence. structured at the time of Hefners 2008 study generated a net loss to the general revenue fund. This has profound implications during budgetary hard times as tax been experienced by to Figure 5.5: South Carolina income tax: Current has rates compared the state in the recent recession. Given that this money is being taxed away from the private inflation-indexed rates, 2009 sector, it should be spent on what capitalism considers the legitimate functions of limited government (e.g. property rights enforcement, infrastructure development, education), and not to favor a particular industry. When government Income Tax Rates/Bracketsto 1959 Tax a spends taxpayer dollars if subsidize Currentburden to individuals and businesses will increase. As noted Income Tax targeted industry the relative tax Schedule was Inflation Adjusted to Rates/Brackets in Chapter 2, taxing money away from one area of the private sector only to give it to another 2009 segment of the private sector is not capitalism. This policy merely redistributes wealth and Tax will not lead to greater Tax economic growth. Further, when the subsidyAverage Tax drain on the generates a Rate Average Tax Rate Taxable Income Amount governments budget,Amount core government services taxpayers expect to receive may be cut. $5,000 $71 $125 The conclusion that subsidies 1.42%film cluster are a net loss to2.5% revenues has to the state also been confirmed in$290 multiple states. The Rhode Island Department of 2.5% Revenue estimated $10,000 $250 2.90% that the state of Rhode Island gets back $0.28 for every dollar it provides to production $15,000 $604 $377 4.03% companies.20 The Connecticut Department of Economic and Community2.51% Development, after $20,000 $954 $527 4.77% and Sept. 30, 2007, determined that the state 2.63% analyzing 13 projects between July 1, 2006, received $0.08 in tax $1,654 for every dollar spent.21 In Michigan, the 2.78%Senate Fiscal revenue State $30,000 $834 5.51% Agency reports that in 2008 the anticipated cost to the state was $127 million which was $50,000 $3,054 $1,695 6.10% 3.39% estimated to generate only $10 million in tax receipts. In Wisconsin before their incentive bill $75,000 $4,804 $3,127 6.41% 4.17% was proposed, their Department of Revenue determined that the state would likely see a net 22 loss in$100,000 Louisianas chief economist in 2005 estimated that the 4.88% revenue. state revenue gains $6,554 $4,877 6.56% from the total economic activity of film production would be about 16 percent - 18 percent of $8,377 $150,000 $10,054 6.70% 5.58% state tax credit costs.23 $200,000 multiple studies that demonstrate that the kinds of incentives given to the $13,554 $11,877 6.77% 5.94% There are film industry are a drain on the general revenues of the states pursuing this industry. This leads many researchers shows the very relevant question of whether the states that and taxes Figure 5.5 also to ask what the average tax rates are for various incomes give such generous current tax the film industry could have the right columns it also other what the under the subsidies to system in South Carolina. Inbetter spent those funds in showsways that would have produced stronger and if the 1959 tax economies. To answer this question taxes and average tax rates would bemore sustainable tables were indexed for inflation. The requires an understanding of the most relevant concept economics has to offer: opportunity figure clearly shows that the 1959 indexed tax rate structure is more uniformly progressive, cost. The at higher opportunity cost It keeps what is the highest valued alternative that is especially concept oflevels of incomes. examinestax rates extremely low for the lowest income foregone in the state. individualswhen one activity is chosen over another. Markusen (2007) observes that Figure 5.5 also shows that the current tax system charges all income groups more in taxes than an indexed rate schedule. The only exception is the $5,000 income earner in the 20 Peoples, Steve, Reviews for states film tax credit arent good, The Providence Journal (projo.com), August table. As South Carolina income taxes continue to climb while the tax brackets remain 12, 2008 21 stagnant, the state becomes a relatively high-tax state. This has a negative impact on Christopherson and Rightor. (Forthcoming 2010).
22 23
Cobb (2006). Albrecht (2005).
manufacturing property tax inin the country.the Figure 5.8 we present the effective property tax opportunity costs are rarely considered in In Figure 5.8 we present the effective property tax manufacturing property tax the country. In incentives game. Kruger (1990) in her aptly rates data for Southeastern Failures in comparison. The ranks given for the states are out of all titled paper,for Southeastern states, for comparison. The ranks us thatfor the states are out ofis rates data Government states, for Development, reminds given action by government all 50 states. The net tax and effectivebut importantcalculated based on propertyCarolinians $25 not a costless activity. This effective tax rate are point should cause property valued at to 50 states. The net tax and simple tax rate are calculated based on South valued at $25 million ($12.5 million ininmachinery and of equipment,$12.5 millionuseininventories, and $2.5 seriously ($12.5 million these types policies $12.5 million million consider whether machinery andequipment, are the best in of the statesand $2.5 inventories, scarce million inin fixtures). Notice that be better spent on effective tax rateregards as theproperty isis resources. Could these tax dollars South Carolinas what capitalism on industrial legitimate million fixtures). Notice that South Carolinas effective tax rate on industrial property over 7.8 times higher than More most industry-friendly state, Delaware. market forces listed in functions of government? the most industry-friendly state, asking how(Delaware isis would over 7.8 times higher than the importantly we should be Delaware. (Delaware listed in the figure because it itresources withinstate.) have figure because isis the lowest-taxthe private sector had they not been taxed away in the the allocated these the lowest-tax state.) first place.
Figure 5.8: Industrial Property Taxes in Southeastern states*, 2007 Figure 5.8: Industrial RECOMMENDATIONS SUMMARY AND POLICY Property Taxesin Southeastern states*, 2007
State Rank (of 50) Net Tax Effective Tax Rate State Rank (of 50) Net Tax Effective Tax Rate It is not the proper function of government to decide which businesses should receive South do they have 3.73% $1,864,900 3.73% favor, South Carolina the 1 1 nor Carolina unique ability to$1,864,900 identify which of these businesses will succeed. 44 $1,291,050 Mississippi $1,291,050 2.58% This Mississippiof the private sector and the profit and loss system. 2.58% is the role Given 2.53% Texas the vast literature on the ineffectiveness of incentives, one may ask why policy 66 $1,264,358 Texas $1,264,358 2.53% makers persist in asking for legislation to provide more incentives. The literature also argues 10 $1,033,544 2.07% Tennessee 10 $1,033,544 that Tennessee is a political benefit to offering these incentives 2.07%if there is not an there clearly even West one for 14Calcagno and Hefner (2007) find that 1.67% incentives can $833,234 West Virginia $833,234 1.67% economic Virginia the state. 14 offering increase a states corporate 17 revenue, which$783,407 tax might provide political1.57% motivation. Whether or Louisiana Louisiana 17 $783,407 1.57% not tax revenues increase, providing selective incentives gives the appearance that legislatures Georgia 20 $760,381 1.52% Georgia 20 $760,381 1.52% and policy makers are doing something concrete to generate economic development and solve Florida 24addition, Buss (2001) notes that politicians face little risk from $677,683 1.36% 1.36% Florida $677,683 the problems of the state. In24 offering these types of incentives. If the firm fails they can blame it on economic conditions, 1.11% Alabama 35 $533,776 Alabama 35 $533,776 1.11% and if it is successful they can take all the credit. Public choice economics argues that North Carolina 37 $491,071 0.98% 37 $491,071 0.98% North Carolina politicians are often short-sighted in their policy judgments, not looking beyond the next 0.65% Kentucky $327,100 Kentucky 47 $327,100 0.65% election cycle (see Chapter 47 12). South selective that create distortions Virginia Carolina offers49wide variety of $241,498 tax incentives0.48% 49a 0.48% Virginia $241,498 in the economy and limit the ability of the private sector to generate economic growth. These Delaware 50 $238,840 0.48% Delaware 50 $238,840 0.48% incentives simply create unnecessary competition between states increasing the incentives Source: National Association Manufacturers (2009) Source: Manufacturers offered TaxesNational Association ofof largest city only. to reform its property tax laws so they can stop for measured inin South Carolina needs(2009) * Taxes little benefit.the states * measured the states largest city only. using it as an excuse to offer these incentives. A lower tax rate for business and property across the board will South Carolinas effective tax rate isisalmostCarolina than greaterthan Importantly, do more Carolinas effective tax rate in South 2.5 times greater than Importantly, South to generate economic growth almost 2.5 times any selective tax, and almost times greater than North Carolinas. This puts South Carolina at a Georgiasincentive.almost 4 4 times greater than North Carolinas. This puts South Carolina at a Georgias tax, and serious disadvantage, inin terms of its ability to attract and keep industry. Since South Carolina serious disadvantage, terms of its ability to attract and keep industry. Since South Carolina has the highest tax inin the country on industrial property, it should be no surprise that it has has the highest tax the country on industrial property, it should be no surprise that it has one of the lowest per capita incomes and economic growth rates inin the country. one of the lowest per capita incomes and economic growth rates the country. Although it it is probably not critical that South Carolina set its tax rate to the lowest in Although is probably not critical that South Carolina set its tax rate to the lowest in the country, it itshould definitely make it itatatleast competitive for the Southeast. Since the country, should definitely make least competitive for the Southeast. Since Georgias rate isis effectively 1.52 percent and North Carolinas is just under 1 percent, a rate effectively 1.52 percent and North Carolinas is just under 1 percent, a rate Georgias rate atataround 1 1percent might be sufficient totoattract more industry. Working to reduce the around percent might be sufficient attract more industry. Working to reduce the various taxes applied toto industry would seriously improve the states competitiveness. various taxes applied industry would seriously improve the states competitiveness. Such a a significant reduction in taxes on industrial property would obviously lead to a Such significant reduction in taxes on industrial property would obviously lead to a reduction inintax revenues on industrial property, atatleast initially. However, the overall reduction tax revenues on industrial property, least initially. However, the overall revenue may ininfact increase once the growth rate inin the state begins to pick up andmore revenue may fact increase once the growth rate the state begins to pick up and more industry moves into the state. Furthermore, ifif the official tax rates are lowered, then the state industry moves into the state. Furthermore, the official tax rates are lowered, then the state
Chapter CHAPTER 5: arolinas TAX REFORMS 7: south C SPECIFIC 7 ax inCentives CHAPTER t Presumably REFERENCES
145 13 17
the original intent of imposing a tax rate schedule with graduated marginal tax rates was to make the income tax progressive. However, what progressivity exists in the states income tax structure isTax Incentives: tax on the first $2,630 andincome, Albrecht, Greg. 2005. Film and Video due to the zero Estimated Economic of Fiscal and because of Baton Rouge: State of Louisiana Legislative Fiscal Office, March. tax rate Impacts, the graduated marginal tax rates. However, since the marginal increases over such small steps in income, as shown in FigureState most of the Development Ambrosius, Margery Marzahn. 1989. The Effectiveness of 5.5, Economic progressivity occurs Policies: A Time-Series Analysis. Western Political Quarterly 42:283-300. levels, the at lower income levels, not higher levels of income. At higher income averageTimothy hardly increases at all. This nature Local Economic Development Policies on Bartik, tax rate J. 2002. Evaluating the Impacts of of the current tax is directly contradictory to the goal of Economic Outcomes: What has been Doneappears that is Doable? Upjohn Local progressivity. So although on the surface it and What the tax satisfies the verticalInstitute condition, it really does this03-89. at the lower incomeUpjohn reducing the equity Staff Working Paper No. only Kalamazoo: W.E. levels Institute for wealth of these lowest income taxpayers, not the intended consequence. Employment Research. Bartik, Timoty J. 1994. Jobs, Productivity, and Local Development: What Implications does Figure 5.5: South Carolina income of Government? National Tax Journal 47 (4): Economic Research have for the Role tax: Current tax rates compared to 847-861. inflation-indexed rates, 2009 Bennett, James, and Thomas Dilorenzo. 1983. Underground Government: The Off-Budget Public Sector. Washington, DC: Cato Institute. Income Tax the Souths Economic Rise? Becsi, Zsolt. 1996. Have Current Income Tax State and Local Taxes Contributed to Rates/Brackets if 1959 Tax Schedule was Inflation Adjusted Federal Reserve Bank of Atlanta Regional Update July-September 9 (3): 6-7. to Rates/Brackets 2009 Burstein, M.L. and A.J. Rolnick. 1995. Congress should End the Economic War Among the States. Federal Reserve Bank of Minneapolis 1994 Annual Report 9 (1): 3-19. Tax Tax Average Tax Rate Taxable Income Buss, Terry F. 2001.Amount Average TaxTax Incentives on Economic Growth and Firm The Effect of State Rate Amount Location Decisions: An overview of the Literature. Economic Development Quarterly $5,000 $71 $125 1.42% 2.5% 15 (1): 90-105. $10,000 $290 $250 2.90% 2.5% Buss, Terry F. 1999a. The Case Against Targeted Industry Strategies. Economic Development Quarterly $15,000 13 (4): 339-356. 4.03% $604 $377 2.51% Buss, Terry F. 1999b. To target or not to target, thats the question: A response to Wiewel and $20,000 $954 $527 4.77% 2.63% Finkle. Economic Development Quarterly 13 (4): 365-370. $30,000 $1,654 $834 5.51% 2.78% Calcagno, Peter T. and Henry Thompson. (2004) State Economic Incentives: Stimulus or Reallocation? Public Finance Review 35 (5): 1-15. $50,000 $3,054 $1,695 6.10% 3.39% Calcagno, Peter T. and Frank Hefner. (2007). State Targeting of Business Investment: Does $75,000 $4,804 $3,127 6.41% 4.17% Targeting Increase Corporate Tax Revenue? Journal of Regional Analysis and Policy $100,000 $4,877 6.56% 4.88% 37 (2): 90-102.$6,554 Christopherson, Susan and Ned Rightor. Forthcoming 2010. The Creative Economy as Big $8,377 $150,000 $10,054 6.70% 5.58% Business- Evaluating State Strategies to Lure Film Makers, Journal of Planning $200,000 $13,554 $11,877 6.77% 5.94% Education and Research, 30 (1). Cobb, Kathy. 2006 Roll the Credits and the Tax Incentives, Fedgazette, Minneapolis, MN: Figure 5.5 also showsof Minneapolis, September. are for various incomes and taxes Federal Reserve Bank what the average tax rates under the current tax system Development Incentives Good or Bad? Federal Reservewhat the Cunningham, Thomas. 1995 in South Carolina. In the right columns it also shows Bank of taxes and average tax rates would be if the 1959 (1): 8-9. were indexed for inflation. The Atlanta Regional Update January-March 8 tax tables figure clearly shows 1998.the 1959 indexed tax rate structure is more uniformly progressive, Dewar, Margaret E. that Why State and Local Economic Development Programs Cause so especially at higher levels of incomes. Economic Development Quarterly 12the lowest income Little Economic Development. It keeps tax rates extremely low for (1): 68-87. individuals Kelly state. Edmiston, in the D. 2004. The Net Effects of Large Plant Locations and Expansions on Figure 5.5 also showsJournal of Regional Science 44(2): 289-319. County Employment. that the current tax system charges all income groups more in taxes than an indexed rate schedule. The only exception is theDevelopment as earner in the Ellis, Stephen, and Cynthia Rogers. 2000. Local Economic $5,000 income a Prisoners table. As South Carolina income taxes continue to climb while the tax 30 (3): 315-330. Dilemma: The Role of Business Climate. Review of Regional Studies brackets remain stagnant, Peter state becomesRiserelatively high-tax state. This has andnegative impact on Esinger, the K. 1989. The a of the Entrepreneurial State: State a Local Development Policy in the United States. The University of Wisconsin Press, Madison.
146 UNLEASHING CAPITALISM 18 18
manufacturingR. property tax in the country. Income Taxes Reduce Wages? Federal Reserve Felix, Alison property Do State Corporate In Figure 5.8 we present the effective property tax manufacturing 2009. tax in the country. In Figure 5.8 we present the effective property tax rates data for of Southeastern Economic Review 94(2): 77-102.given for the states are out of all Bank Southeastern states, for comparison. The ranks rates data for Kansas City states, for comparison. The ranks given for the states are out of all 50 states. The net tax andThe Case Against Targeting Might haveon property valued at $25 Finkle, Jeffery net 1999.and effective tax rate are calculated based been moreTargeted. 50 states. The A. tax effective tax rate are calculated based on property valued at $25 million Economicmillion inmachinery and 13 (4): 361-364. million inininventories, and $2.5 ($12.5 Development Quarterly equipment, $12.5 million ($12.5million in machinery andequipment, $12.5 million inventories, and $2.5 million inin fixtures). Gone with South CarolinasGo for thetax rate onBreaks, Theproperty isis Foderaro, L.W.2008.Notice that the Cash: Films effective Best rate on industrial New York million fixtures). Notice that South Carolinas effective tax Tax industrial property over 7.8 times March 29. http://www.nytimes.com/2008/03/29/nyregion/29film.html is listed in Times, higher than the most industry-friendly state, Delaware. (Delaware is over 7.8 times higher than the most industry-friendly state, Delaware. (Delaware listed in the figure becauseandisMatthew Murray. 2004. Do Economic Effects Justify the Use of Fiscal Fox, figure because it is the lowest-tax state.) the William F., it the lowest-tax state.) Incentives? Southern Economic Journal 71(1): 78-92. Gabe, Todd M. and David S. Kraybill. 1998. Tax Incentive Re-quests and Offers in a State Economic Industrial Property Taxes in Southeastern states*, Figure 5.8: Industrial Property Taxes Regional Studies 28 (3): 1-14. 2007 Figure 5.8:Development Program. Review of in Southeastern states*, 2007 Gabe, Todd M., and David S. Kraybill. 2002. The Effect of State Economic Development State Rank (of 50) Net Tax State Rank (of 50) Effective Tax Rate Incentives on Employment Growth Net Establishments. Effective Tax Rate of Tax Journal of Regional Science South Carolina 11 $1,864,900 3.73% South Carolina $1,864,900 3.73% 42(4): 703-730. Garcia-Mila, Teresa, and Therese McGuire.$1,291,050 Incentives and the City, Brookings2002. Tax Mississippi 44 2.58% Mississippi $1,291,050 2.58% Wharton Papers on Urban Affairs. 2.53% Texas 6 $1,264,358 Texas $1,264,358 2.53% Gillespie, William C. and 6 Robert W. Martin. 2008. Tax Incentives for Economic Tennessee 10 $1,033,544 2.07% Tennessee 10 $1,033,544 Development in South Carolina Corporate and Individual 2.07% Tax Credits Income Rebates/Transfers/Appropriations Fiscal Year 2006-07. South Carolina: South West Virginia 14 $833,234 1.67% West Virginia 14 $833,234 1.67% Carolina Budget & Control Board Board of Economic Advisors. Louisiana 17 $783,407 1.57% Louisiana 17 1.57% Hefner, Frank. 2008. Impact Analysis for $783,407 Film Production in South Carolina, S.C. Georgia 20 Council $760,381 1.52% Georgia 20 $760,381 Economic 1.52% Development, Coordinating for http://www.sccommerce.com/docdirectory/ Florida 24 $677,683 1.36% 1.36% Florida 24 $677,683 Hicks, Michael J. 2004. A Quasi-Experimental Estimate of the Impact of Casino Gambling on 1.11% Alabama 35 $533,776 Alabama 35 $533,776 1.11% the Regional Economy. Proceedings of the 93rd Annual Meeting of the National Tax North Carolina 37 $491,071 0.98% 37 $491,071 0.98% North Carolina Association. Hicks,Kentucky J. 2007a. The Local Economic Impact of Wal-Mart.0.65% York: Cambria Michael New 0.65% Kentucky 47 $327,100 47 $327,100 Press. Virginia 49 $241,498 0.48% 0.48% Virginia 49 $241,498 Hicks, Michael J. 2007b. A Quasi-Experimental Test of Large Retail Stores Impacts on Delaware Labor Markets: The Case of$238,840 Retail Outlets. Journal of Regional 50 0.48% Delaware 50 $238,840 0.48% Regional Cabelas Source: National Association ofof Manufacturers (2009) Source: National Policy, 37 (2):116-122.(2009) Analysis and Association Manufacturers * Taxes measured inin the states largest city only. * Michael J., and William F. Shughart II. 2007. Chapter 8 in Russell S. Sobel (ed.), Taxes measured the states largest city only. Hicks, Unleashing Capitalism: Why Prosperity Stops at the West Virginia Border and How Importantly,Morgantown, WV: effective fortaxrate isisalmost 2.5 The Public Policy South Carolinas effective rate toImportantly,South Carolinas Center tax Economic almost 2.5times greater than Fix It. Growth, times greater than Georgias tax, and almost 4 4 times greater than North Carolinas. This puts South Carolina at a Georgias tax, andof West Virginia, pp. 119-130. Carolinas. This puts South Carolina at a Foundation almost times greater than North serious disadvantage, Hsu,terms of its ability Katie Tallman. 2000. Minding the South Carolina serious disadvantage, in Greg Leroy, andto attract and keep industry. Since South Carolina Hinkley, Sara, Fiona in terms of its ability to attract and keep industry. Since Candy Store: has the State Audits inin Economic Development property, on should be andsurprise that it it has highest tax has the highest tax ofthe country on industrial Institute it it Taxation no Economic Policy. the country on industrial property, should be no surprise that has one of the lowest per capita incomes and economic growth rates inin the country. one ofGood Jobs First. 1-84.incomes and economic growth rates the country. the lowest per capita Although it it is probably not and that South Carolina set its tax rateIncentives and Although is probably not critical that South Carolina set Business the lowest in Hoyt, William, Christopher Jepsen,criticalKenneth Troske. 2008its tax rate toto the lowest in the country, it itshould definitely make it itatatleast competitive for Kentucky, Institute for the country, should definitely make least competitive for the Southeast. Since Employment: What Incentives Work and Where? University of the Southeast. Since Georgias rate isis effectively 1.52 percentRelations Working Papersjust under 1 percent, a rate effectively 1.52 percent and North Carolinas isis Series 2009-02: 1-40.rate Georgias rate and Intergovernmental and North Carolinas just under 1 percent, a Federalism atataround 1 1percent might be sufficient totoattract more industry. Working to reduce the around attract more industry. Working to reduce the Kruger, Anne.percent might be sufficient 1990. Government Failures in Development, The Journal of Economic various Perspectives, Vol.industry would seriously improve the states competitiveness. taxes applied to industry 3: 9-23. various taxes applied to 4, No. would seriously improve the states competitiveness. Such a a significant reduction in taxes on industrial property would obviously lead to a Such significant reduction in taxes on industrial property would obviously lead to a LeFaivre, Michael and Michael Hicks 2005. MEGA: A Retrospective Assessment. Michigan: reduction inintax revenues on industrial property, atatleast initially. However, the overall reduction tax revenues on industrial property, least initially. However, the overall Mackinac Center for Public Policy. revenue may ininfact increase once the growth rate inin the state begins to pick up andmore revenue may fact increase once the growth rate the state begins to pick up and more LeRoy, moves into The Great American Jobs Scam: Corporate Tax Dodging and the Myth industryGreg. 2005. the state. Furthermore, ifif the official tax rates are lowered, then the state industry moves into the state. Furthermore, the official tax rates are lowered, then the state of Job Creation. San Francisco: Berrett-Koehler.
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Presumably the 2007. Reining of imposing a tax Capital. Kalamazoo, MI.: W. Markusen, Ann. (editor) original intent in the Competition forrate schedule with graduated marginal tax ratesInstitute for Employment Research E. Upjohn was to make the income tax progressive. However, what progressivity exists inJoe, states incomeSpiegel. 1995. is due to and Localtax on the firstfor Firms Harmful? Mauey, the and Mark M. tax structure Is State the zero Competition $2,630 of income, and because ofReserve Bank of San Francisco rates. However, since the marginal tax rate Federal the graduated marginal tax Weekly Letter: (95-26). increases over such small steps in income, as shown in Figure 5.5, mostNeedless Subsidies? Morse, Steve. 1996. Georgia Jobs Tax Credits: Needed Incentives or of the progressivity occurs Georgia Public Policy Foundation, March 29. income. At higher income levels, the at lower income levels, not higher levels of averageJohnrate hardly increases at all. This nature of the current tax is directly contradictory Peavy, tax Patrick. 2007. A Comparison of Two Alternative Models of Economic Impact: A to the goal ofStudy of the So although on the surface it Unpublished the tax satisfies the Case progressivity. Mississippi Nissan Plant. appears that Ph.D. dissertation, verticalUniversity of Mississippi. does this only at the lower income levels reducing the equity condition, it really wealth ofSteve. lowestReviews taxpayers, not the intended consequence. Providence Journal. Peoples, these 2008. income for states film tax credit arent good. The 12 August. Peters, Alan, and Peter Carolina income tax: Current taxDevelopment Incentives. Figure 5.5: South Fisher 2004. The Failures of Economic rates compared to Journal of the American Planning Association 70(1): 27-37. Poole, Kenneth E., Georgeinflation-indexed rates, 2009Nancy McCrea, and Pofen A. Erickecek, Donald T. Iannone, Salem. 1999. Evaluating Business Development Incentives. U.S. Department of Commerce Economic Development Administration: National Association ofTax Income Tax Rates/Brackets if 1959 State Current Income Tax Development Agencies. Schedule was Inflation Adjusted to Saiz, Martin. 2001. Using Rates/Brackets Program Attributes to Measure and Evaluate State Economic 2009 Development Strategies. Economic Development Quarterly 15 (1): 45-57. Tax Average Tax Rate The Economic Impact of BMW Average Tax Rate 2002. Division of Research, University of on South Carolina. Tax Taxable Income Amount Amount South Carolina. $71 $125 1.42% 2.5% Trogen,$5,000 Which Economic Development Policies Work: Determinants of State Per Paul. Capita 1999. $10,000Income. $290 International Journal of Economic Development 1.3: 256-279. $250 2.90% 2.5% Wiewel, Wim. 1999. Policy Research in an Imperfect World: Response to Terry F. Buss the $15,000 $604 $377 4.03% 2.51% Case Against Targeted Industry Strategies. Economic Development Quarterly 13 (4): $20,000 $954 $527 4.77% 2.63% 357-360. Woodward, Douglas, $1,654 Miley, 5.51% Harry and Holley Ulbrich. 2000. Education and Economic $30,000 $834 2.78% Development in South Carolina. The Strom Thurmond Institute. Clemson University. $50,000 $3,054 $1,695 6.10% 3.39% http://www.strom.clemson.edu/teams/ced/edecdevsc/ $75,000 $4,804 $3,127 6.41% 4.17% $100,000 $6,554 $4,877 6.56% 4.88% $150,000 $200,000 $10,054 $13,554 6.70% 6.77% $8,377 $11,877 5.58% 5.94%
Figure 5.5 also shows what the average tax rates are for various incomes and taxes under the current tax system in South Carolina. In the right columns it also shows what the taxes and average tax rates would be if the 1959 tax tables were indexed for inflation. The figure clearly shows that the 1959 indexed tax rate structure is more uniformly progressive, especially at higher levels of incomes. It keeps tax rates extremely low for the lowest income individuals in the state. Figure 5.5 also shows that the current tax system charges all income groups more in taxes than an indexed rate schedule. The only exception is the $5,000 income earner in the table. As South Carolina income taxes continue to climb while the tax brackets remain stagnant, the state becomes a relatively high-tax state. This has a negative impact on
148 18 18
manufacturing property tax inin the country. In Figure 5.8 we present the effective property tax manufacturing property tax the country. In Figure 5.8 we present the effective property tax rates data for Southeastern states, for comparison. The ranks given for the states are out of all rates data for Southeastern states, for comparison. The ranks given for the states are out of all 50 states. The net tax and effective tax rate are calculated based on property valued atat $25 50 states. The net tax and effective tax rate are calculated based on property valued $25 million ($12.5 million ininmachinery and equipment, $12.5 million inininventories, and $2.5 million ($12.5 million machinery and equipment, $12.5 million inventories, and $2.5 million inin fixtures). Notice that South Carolinas effective tax rate on industrial property is million fixtures). Notice that South Carolinas effective tax rate on industrial property is over 7.8 times higher than the most industry-friendly state, Delaware. (Delaware isis listed in over 7.8 times higher than the most industry-friendly state, Delaware. (Delaware listed in the figure because it it is the lowest-tax state.) the figure because is the lowest-tax state.)

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CHAPTER 5: SPECIFIC TAX REFORMS

UUNLEASHING CAPITALISM NLEASHING CAPITALISM

CHAPTER 5: SPECIFIC TAX REFORMS

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Esinger (1989) Buss (1999a, 1999b, 2001)

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Figure Gabe and 5.5: Kraybill (2002)

$10,000 $15,000 $20,000 $30,000

LaFaive and $50,000 Hicks (2005)

$75,000 $100,000 $150,000

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Average Tax Rate

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State and Local s (Millions) 118

Income Tax 4.0% Rates/Brackets1.5% $185,439,957

Average Tax Rate

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Average Tax Rate Amount sales tax incentive Refundable

$5,000 $10,000 $15,000

2.51% 2.63% 2.78% 3.39%

$954rebate on in- state costs on a minimum of $500000. $527 4.77% 25 %

$75,000 $100,000 $150,000

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Cobb (2006). Albrecht (2005).

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UUNLEASHING CAPITALISM NLEASHING CAPITALISM

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