PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Tax Reform and Relief: Examples from the States

By at 27 September, 2017, 1:42 pm

by Raymond J. Keating-

As Congress and the White House work to hammer out a pro-growth tax reform and relief package, it pays to take a look at the states for some inspiration.

For the past six years, SBE Council has published the “Small Business Tax Index,” which ranks the states according to key tax measures affecting entrepreneurship, small businesses, investment and economic growth. That report is a spinoff of the broader “Small Business Policy Index,” which has now been published for 21 years, and roughly half of those measures are taxes or tax related.

On each of these indices, assorted states have improved their competitiveness and business environments by making substantive, positive changes in their tax systems.

Consider a few examples where substantial changes have been made:

Ohio

Ohio’s corporate income tax stood at 8.5 percent in 2005, for example, and now, there is no such tax. For good measure, the state’s death tax was eliminated in 2013. In addition, the state personal income and capital gains tax were reduced, from a top rate of 7.185 percent in 2005 to 4.997 percent.

North Carolina

The state’s corporate income and capital gains tax rate declined from 6.9 percent to 6 percent in 2014, 5 percent in 2015, 4 percent in 2016, and 3 percent in 2017. And the personal income and individual capital gains tax was reformed effective for 2014, with three tax rates of 6 percent, 7 percent and 7.75 percent being replaced with a 5.8 percent flat tax.  That rate then declined to 5.75 percent in 2015, and now stands at 5.499 percent. The corporate tax rate is now scheduled to be reduced to 2.5 percent in 2019, and the personal rate to 5.25 percent. For good measure, the state’s death tax was eliminated in 2013.

New Mexico

New Mexico made some substantial changes that have improved its policy environment for entrepreneurship and investment. In the very early 2000s, the top state personal income and individual capital gains tax rate stood at 8.2 percent, but a reform and relief package passed in 2003 eventually reduced the personal income tax rate is 4.9 percent, and the capital gains rate to 2.45 percent. Also, in recent years, the state has reduced its top corporate tax rate from 7.6 percent to 6.2 percent, and it will decline to 5.9 percent in 2018.

Indiana

In 2011, the corporate income and capital gains tax rate in Indiana stood at 8.5 percent. It has subsequently been reduced to 6 percent, and is scheduled to be phased down to 4.9 percent by 2021. Meanwhile, the state’s individual income and capital gains tax declined from 3.4 percent in 2014 to 3.23 percent in 2017. The state’s death tax also was terminated in 2013.

These four states altered their taxes in significant, pro-small business, pro-growth ways, namely, reducing income and capital gains taxes, and ending death taxes. That’s a basic model that federal tax reform needs to follow.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

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