Do Taxes and Economic Incentives Effect Business Location and Personal Mobility Decisions - Essay Example

Sur Supervisor Prompt: Do taxes and economic incentives effect business location and personal mobility decisions? How effective are state economic incentives? It is a common perception that taxes and economic incentives not only effect business location but also migration decisions. However, various studies of the past do not reach to the same conclusion. The paper attempts to explore the real truth based on some research studies conducted in the recent years. Various studies of the past have revealed that state and local taxes do not play a significant role in business location decisions. Investment decisions are more influenced by market potentials and quality-of-life factors than financial incentives provided by establishment. At least 20 of the 24 studies concluded that financial incentives were of little importance for business location decisions. As per the Howard Stafford study done in 1974, it has been revealed that labor rates, market accessibility, utilities, supplies, infrastructure facility, labor availability, convenience score above taxation factors (Lynch). In 1980, Schmenner during his survey found that decision makers were not giving any priority to lower taxes while locating their businesses. In another survey done by him in 1982 with Fortune 500 companies, he found that only 1 percent of them gave serious consideration to lower-tax locations; however, 35 percent of them did show their desire for lower taxes when other necessities are fulfilled. In 1981, Michael Kieschnick, through one of his survey, found that labor costs, access to raw materials, transportation of networks, market size were far more important for new and expanding companies while locating their businesses. So was the finding of John Hekman in 1980s when he surveyed several firms in Virginia, North Carolina and South Carolina region. The firms gave importance to other factors such as production costs, land availability, housing infrastructure, cost of living, and environmental quality (Lynch). Several econometric and statistical studies have also concluded that tax incentives do not enhance economic performance of the region. Roger Wilsons study done in 1989 also concludes that business incentives do not necessarily create jobs; jobs are not lost in absence of tax incentives from one state to another. In recent times, in the survey of 2002, Peters and Fisher discovered that taxes do not significantly influence economic growth in the region. There is a substance in Wasylenkos argument that when taxes are reduced, the resulting revenue loss affects quality and quantity of public services. That is certainly not a pleasant situation for anyone in the sense that it causes considerable negative impact on the local economy. Bartik too asserted that any tax reduction would eventually reduce the activity level of public services that in turn, would cause lesser business activity. The reason lies in lesser revenue collection that will force authority to reduce public expenditures and even public sector jobs. The argument that tax cuts lower the quality and quantity of public services and force firms to leave is valid in the sense that firms that get attracted to the state due to its superior public services and in absence of that firms would prefer to move out. For high-skilled labor enhanced public services is a prerequisite to stay in the state while tax cuts will fail to meet that requirement. Moreover, econometric research also suggests that tax reduction fail to create jobs in a cost-effective manner (Lynch). Again, there is a big fallacy in the supply-side argument, which states that tax cuts will lead to increase in savings causing more economic activity. In reality, tax cuts result into only a small increase in individual savings as suggested by Heckman and that does not become a criterion for businesses to move when states fail to fulfill other essential needs of businesses that include improved infrastructure, transportation and security (Lynch). Similarly, demand-side theory does not hold true when it argues that tax cuts can create jobs and enhance economic activity. Government spending is usually directed towards public welfare services. Moreover, unlike the federal government states cannot finance public services program through borrowings so reduction in their spending is bound to follow after any tax cuts (Lynch). It is wrong to believe that migration is strongly influenced by state tax rates. Between 2001 and 2010, merely 1.7 percent of US population migrated from one state to another per year. Moreover, only 30 percent of the people of the US migrate from one state to another in their entire lifetime. They do so for compelling reasons such as change in jobs, better climate or cheaper housing. Numerous factors such as persons age, education, health also play a role while moving from one state to another (Tannenwald et al.). Availability of cheaper housing is certainly a bigger incentive for people to migrate rather than lower taxes. While Florida does not impose tax on its residents yet its population has declined in recent years after going up in the past. The reasons for this reversal can be attributed to increase in housing costs. Similarly, in California where housing costs have increased dramatically people have migrated to neighboring states. As per the study done by the Public Policy Institute of California, it was found that between 2004 and 2007, considerable population from California migrated to a nearby state Arizona. On scrutiny, it was found that availability of the cheaper housing in Arizona was the reason behind the migration as this helped people to reduce their mortgage cost between 15 and 24 percent. Overall savings to migratory population is much larger than any tax benefits offered by California (Tannenwald et al). The case of New Jersey is a glaring example establishing that tax hike does not result into any large scale migration of residents. When, in 2014, New Jersey increased its tax rate for those having incomes exceeding $500,000, only 70 households migrated from the state impacting revenue earnings to the extent of only 0.4 percent. It is not significant in the sense that the state could increase its tax revenue by $3.77 billion due to tax hike (Tannenwald et al). Tannenwald et al. argue that natural calamities such as Hurricane Katrina or Rita, and periodic cyclones cause people to migrate. Personal considerations such as mild climate, wanting to live closer to family, college education, or intention to serve armed services have been detected as other reasons for migration. Age is another consideration to migrate, especially for the people with age between 18 and 24, especially when they are single and upwardly mobile. States with amenities such as recreational opportunities, efficient public services on utilities and transport, education infrastructure for kids and growing children attract potential migrants significantly. Low taxes may reduce the cost of living to a certain extent but at the same time the state fail to provide needed support to public services discouraging people to migrate. The fact is that people migrate for a variety of reasons; tax policy is a minor reason behind such movements. Economic motives such as lucrative job opportunity, cheaper housing play a pivotal role for migrating households. The point is that lower taxes are not a primary reason for a household to migrate in that state. Policy makers are strongly influenced by advocates of tax cuts in most instances; however, in reality, the effect of tax increase on mobility is only marginal. Reverse is also true that reduced taxation is not likely to trigger inward migration from other states in large scale. Often, the issue is not scrutinized in depth by policy makers. Tax reductions after all result into withdrawal of most vital public services in the field of health and education creating more harms than benefits. Finally, it can be safely concluded that taxes and economic incentives do not influence business location decisions and personal mobility decisions. In fact, effectiveness of state economic incentives largely depend upon numerous factors as discussed in this paper. Works-Cited Lynch, Robert. Rethinking Growth Strategies: How State and Local Taxes and Services Affect Economic development. Economic Policy Institute. Washington, D.C. 2004. Tannenwald, Robert; Shure, Jon; Johnson, Nicholas. “Tax Flight Is a Myth: Higher State Taxes Bring More Revenue, Not More Migration”. Center on Budget and Policy Priorities. 2011. Read More