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Effects of Taxes and Economic Incentives on Business Essay

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Updated: Jun 25th, 2020

Introduction

A lot has been written about the impacts of state taxes and economic incentives on businesses and individuals. Some of the issues examined are the effects of these phenomena on decisions to do with business mobility. A wide range of factors are taken into consideration when firms are making major decisions about expansion or relocation of their operations. The aspects include productivity and sales in the new location, access to markets and suppliers, energy and transportation costs, and availability of labor. In addition, corporations evaluate other features, such as state and local taxes and incentives, public safety, and infrastructure before relocating (Lynch 22). In spite of the wide array of these elements, analysts argue that taxes play the most critical role in influencing the location choices.

In this paper, the author will assess the impacts of taxes and economic incentives on business and personal mobility decisions. In addition, the effectiveness of state financial inducements will be evaluated. The analysis will be based on information from “Rethinking Growth” and “Tax Flight”.

Effects of Taxes and Economic Incentives on Business and Personal Mobility Choices

A wide variety of techniques have been employed to determine the impacts of taxes and incentives on businesses. They include survey research, statistical analyses, and representative firm approaches. The studies have provided information on the subject matter. According to Lynch the level of taxes and economic incentives has minimal influence on decisions touching on location of entities (34). The reason behind this is because there are other major factors that impact on these choices. The aspects tend to be of more importance compared to taxes and inducements. In certain instances, some corporations tend to relocate to areas with higher tax rates.

They seem not to favor those areas regarded to have low state levies (Weiner 50). It is noted that an area may seem suitable for businesses and other operations due to reduced taxes and incentive rates. However, the location may lack core elements required to push the business to greater heights. The factors include labor, access to raw materials, and adequate transport networks. The elements are critical to the success of contemporary business organizations.

With regards to the aspect of personal mobility, taxes and economic incentives also tend to have minimal influence on decisions to do with locations and movements. Surveys conducted on migration of populations reveal that most people have strong relations to their original states. They are unwilling to move out to other areas unless the relocation is mandatory. In instances of increased tax rates, people tend to relocate due to other reasons rather than the levies (Tannenwald, Shure and Johnson 1).

Consequently, it is erroneous to assume that migrations from a state with high tax rates to one with low levies are brought about by the issue of these government policies. On the contrary, it is evident that other factors come into play. They include new jobs, better climate, and cheap housing in the new localities. Other aspects that influence personal mobility and related decisions are age, education, and marriage of the individual in question.

In some instances, people have the opportunity to migrate to states with lower tax levels than their home locations. However, their decision to move takes into consideration other more important factors, such as housing costs and employment opportunities. In Florida, for example, a big number of residents relocated to different cities the moment housing prices increased. In spite of the fact that the state was levying no personal income tax at the time, the inhabitants still opted to move to new areas (Tannenwald et al. 5). What this means is that the locals were not concerned with the income taxes. On the contrary, they were concerned with the issue of increased housing rates in the state.

Effectiveness of State Economic Incentives

Each year, different States spend billions of dollars on tax incentives. The aim of such undertakings is to encourage corporations to invest in these regions (Weiner 45). In addition, the inducements are designed to persuade businesses to locate, retain jobs, and expand within the state. Such moves are deemed by the state governments to be beneficial to the economy of their citizens.

The effectiveness of these incentives is determined by the manner in which they are designed and managed by the concerned stakeholders. In instances where enticements are well administered, a state’s economy can experience extensive growth within a short duration of time. However, for the economic incentives to be effective, the quality of government services should not be decreased to cater for the reduction in taxes (Lynch 27). Such a move may be counterproductive to the state.

It is noted that state economic incentives are important for a number of reasons. However, in some instances, lawmakers grant inducements without full knowledge of their probable impact. In addition, they do not take into consideration the possibility of their failure to work as expected. In instances where incentives turn out to be ineffective, a state can suffer from unanticipated challenges to its budget. When the enticements are well developed, they produce long-term positive effects (Tannenwald et al. 10). The effects are influenced by the fact that state incentives facilitate economic activities. In addition, they guarantee increases in job rates in a cost-effective way.

The primary purpose of state financial incentives is to spur economic growth. However, the inducements are not effective in all cases. The reason behind this is because they encounter a wide range of pitfalls and challenges. Incentives are meant to attract investors to new locations.

However, when a business opts to set up a branch in the area, the incentives will not force the operators to hire or invest within the state’s borders. Failure to stimulate growth within the region reduces the cost-effectiveness of the incentive (Lynch 31). In certain instances, the enticements may force a company to hire employees from the area. After a short period of time, the expected benefits may start being experienced in the neighboring states. The cases are experienced when the investor opts to buy equipment manufactured outside the current state. In addition, the locals may not see the importance of incentives in cases where they lack job opportunities in the new firm.

Conclusion

To determine the manner in which taxes and economic incentives affect business and personal mobility choices, a wide range of factors need to be taken into consideration. The effectiveness of these elements is determined by the design and management process followed. Due to this, a better understanding of the incentives gives the expected outcomes. In addition, governments and policy makers should understand that reduction in taxes and introduction of incentives are not enough when it comes to influencing businesses and people to relocate.

Works Cited

Lynch, Robert. Rethinking Growth Strategies: How State and Local Taxes and Services Affect Economic Development, Washington, D.C.: Economic Policy Institute, 2004. Print.

Tannenwald, Robert, Jon Shure, and Nicholas Johnson. Tax Flight Is a Myth: Higher State Taxes Bring More Revenue, Not More Migration, Washington, D.C.: Center on Budget and Policy Priorities, 2011. Print.

Weiner, Jennifer. State Business Tax Incentives: Examining Evidence of their Effectiveness, Boston, MA: Federal Reserve Bank, 2010. Print.

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