State and local governments all over the country are struggling with budget shortfalls and tough decisions about how to balance their coffers while also promoting economic growth. Across the board, entrepreneurs are credited with driving economic success, and states employ a variety of policies to help business owners.
Given limited resources, the question of how to practically and effectively support entrepreneurs is an important one. To try to better understand what business owners themselves would like, we asked them. It may not surprise you that taxes came up when asked an open-ended question about the ease of doing business in their states, but their feedback offers profound clues for policymakers wanting to help these crucial economic actors.
Relying on survey data from more than 6,000 small business owners across the United States, we found that tax rates, while important, do not significantly affect overall business friendliness. This might come as a shock to many. The old adage about death and taxes is particularly applicable -- few people relish the act of paying taxes and naturally they look at the practice unfavorably.
Using a qualitative analysis, we found that the negative feelings business owners exhibit toward taxes reflect their feelings over the regulatory environment for tax codes, not the tax rates. Furthermore, using a regression analysis, we found that corporate and income taxes were statistically insignificant. It's important to note the simple fact that more than two-thirds of businesses in this country, particularly small businesses, do not pay corporate income tax. Together this implies that, indeed, the state and local policies that would truly help small business owners in the U.S. are not decreases in the tax rate, but instead improvements to taxation codes and administration.
Business owners in our survey -- especially those who operated across city and county lines -- said it was prohibitively difficult to understand which taxes, particularly sales taxes, they needed to pay and how. While plenty of analyses focus on the rate, or existence, or certain taxes, few try to understand the ease of actually paying the taxes. While this may appear trivial, respondents complained over and over about the convoluted nature of the tax code, how difficult it was for them to understand which taxes they should be paying in what amount to all level of government from the city to the state.
States should consider simplifying their tax codes and creating uniformity among city, county and state policies. An example of a similar effort is the Streamlined Sales Tax Project, which seeks to gain uniformity between state and local tax bases, uniformity of major tax base definitions, central electronic registration for all member states and general simplification of state and local taxes. Expanding a project such as this across the entire tax system would represent a real benefit to business owners across the United States.
As a complement to streamlining efforts, states also should implement easily understood online systems that have clear information on the tax code as well as a mechanism to manage and pay business taxes. Online systems for tax payment and management were viewed as extremely helpful by business owners in our survey, but current online systems also were criticized for being unclear and providing information in a disjointed manner. Providing an online platform in which tax policy and administration are integrated and easy to use makes the practical aspect of tax payment much less burdensome and would leverage state efforts to simplify the tax code.
Another recommendation based on feedback from these business owners is that taxes should ideally be handled by a single agency and a single window to reinforce this uniformity and provide business owners with authoritative answers. Business owners complained they had to go to multiple agencies and branches, often receiving conflicting or incomplete information about the details and payment of their taxes. Seeding the responsibility for interacting with the public on the issue of business taxes would provide clarity to business owners and incentives to state administrators to increase the ease of tax compliance.
Last, most other state rankings on tax-related issues are overwhelmingly focused on tax rates and ignore many of the above issues. We would welcome new kinds of reports and rankings that consider the ease of tax codes and payments, not simply the rate of the tax.
These efforts represent potential politically neutral, relatively low-cost approaches to helping business owners. While the recommendations would require initial investments and political capital, the efficiency returns to such streamlined policies are potentially large - and certainly greater than their costs. These policy changes wouldn't lie to rest any questions about ideal tax levels or structures, or solve the budget issues in many states or cities, but they would support a group that is critical to our economic success -- entrepreneurs. That is something we can all agree on.
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