Darryl L. DePriest is the seventh presidentially appointed and Senate-confirmed Chief Counsel for the Office of Advocacy.
Prior to joining the Small Business Administration Office of...
United States Small Business Administration
Office of Advocacy
The Differential Impact of State-Local Tax Incentives
on Small versus Large Firms
by James A. Papke
1995. 167p. Dr. James A. Papke, West Lafayette, IN 47906 under contract no. SBA8138OA94
The use of public funds to finance state economic development tax incentives is an important and controversial policy issue. In debates about the effectiveness of subsidies in influencing investment location, inter-business equity is a recurring theme. Small domestic firms protest that tax incentives benefit primarily large multi-state corporations. This study examines several dimensions of the proposition that small businesses are treated unequally by business tax structures at the state and local levels.
The goals of the analysis are to offer an alternative way of evaluating the impact of state and local business tax policy on small versus large firms, to focus attention on the major types of tax incentives shaping the current economic development agenda, and to illustrate the application of comparative tax burden analysis for the benefit of citizens and government decision makers.
Scope and Methodology
The research progressed through four stages: the development of a conceptual framework for the investment location decision; the formulation of a firm-relevant measure for comparing the incentive effects of differential tax burdens across jurisdictions and firm sizes; application of the measure to the tax structures of the six states in the U.S. Small Business Administration's Region V; and discussion of the study's policy implications.
The major determinants of comparative tax burdens are firm operating characteristics, particularly the composition and location of capital assets and the geographic distribution of product sales. The relevant standard for measuring the incentive effects of tax-cost differentials is the after-tax rate of return on an incremental investment. This measure captures the combined weight and interrelationships of federal, state, and local taxes with respect to capital income in the context of the investment decision process.
The complete report is available from:
National Technical Information Service
U.S. Department of Commerce
5285 Port Royal Road
Springfield, VA 22161
(703) 487 - 4650
(703) 487 - 4639 (TDD)
Order Number: PB96 13121
Cost: A09/$27.00; A02/$12.50 Microf.
*Last Modified 6-11-01