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Tax Competition Alive and Well in the Midwest

2 min readBy: Scott Hodge

This has been an interesting week of contrasts in the states. The week began with a spate of reports out of Illinois that Governor Quinn was preparing to offer a generous package of incentives to Sears, who is threatening to leave the state in the wake of last year’s massive taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increase. Illinois has already struck a deal with Motorola to keep the cell phone manufacturer from jumping ship. One has to wonder how much net new tax revenue the state will actually collect from the tax hike after it has to bribe all of the large firms to remain in the state.

Meanwhile, Indiana and Michigan just made themselves more attractive to those Illinois businesses looking for a friendlier tax environment. Indiana Governor Mitch Daniels signed a bill that will cut Indiana’s corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate from the current 8.5 percent to 6.5 percent by 2015. The rate will be cut by a half-percentage point each year.

Indiana already has a good tax climate for business, ranking 10th on the Tax Foundation’s State Business Tax Climate Index. The lower corporate tax rate – when fully phased in – will surely improve the state’s overall ranking and make the state a magnet for businesses from Illinois and other states will poor tax climates.

Michigan Governor Rick Snyder signed a major tax reform bill that replaces the uncompetitive Michigan Business Tax with a flat 6 percent corporate income tax. This officially ends Michigan’s forty-plus year experiment with a state level Value Added-type of tax on businesses. The state’s corporate tax system ranked 48th on the Corporate Tax Sub-Index on the Tax Foundation’s rankings, which more than offset the positive rankings of the state’s personal and sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. systems.

Our hats off to the governors in these three states for providing us with a perfect case study in tax competition. We will enjoy watching to see how these different tax measures shape the direction of each state’s economy in the years to come.