With taxes and business, less usually means more

Whenever the suggestion of higher taxes comes up in political debate, one important factor should be considered: the effects on businesses.

The Tax Foundation — a nonprofit group based in Washington, D.C., that monitors government fiscal policy — puts numbers to this concept in its annual assessment of how taxes alter the business climates in all 50 states. And the equation generally works out this way: the lower the taxes, the better the climate.

Consider, for example, the hospitable business climates in Wyoming, South Dakota and Nevada. Those three states rank in the top three spots, respectively, in the 2012 State Business Tax Climate Index. It’s no coincidence those three states don’t impose corporate or individual income taxes. Alaska ranks fourth in the index and assesses no income or state sales taxes.

Colorado fares comparatively well in the index, although the Centennial State has been slipping in recent years. Colorado ranks 16th in the 2012 index, up one spot from 2011. The state has ranked among the top 17 states for five years, but has retreated from 10th in 2008.

Colorado fares well overall for its comparatively low corporate, income and property tax rates. For 2012, Colorado ranked ninth among the 50 states for the lowest property taxes, 16th for individual income taxes and 20th for corporate taxes. The state doesn’t fare nearly as well at 44th for its sales taxes.

Why does all of this matter? Taxes matter. Tax rates and structures constitute a significant part of the decision business owners and managers make when deciding where to locate their operations — or, in some cases, relocate their operations. As anyone who’s ever worked in economic development can tell you: the competition is fierce.

Mark Robyn, an economist at the Tax Foundation, reiterates the point. “Even in our global economy, a state’s stiffest and most direct competition often comes from other states.”

So when state legislators in Denver and every other state capital ponder ways to encourage businesses to create jobs — and job growth tops at least the proclaimed legislative agenda nearly everywhere these days — lawmakers would do well to keep taxes in mind. Even as they consider tax credits and a myriad of other complicated schemes to attract and retain businesses, there’s a far more straightforward approach. Keep taxes low. Keep taxes simple.

As lawmakers face unprecedented challenges to bridge jaw-dropping budget gaps, it’s tempting to raises taxes rather than continue the difficult search for further cuts. But when it comes to taxes and business, nothing’s so certain that less is more. Lower taxes create a climate that encourages business development that in turn creates jobs and, ultimately, higher tax revenues.