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Sunday, September 30, 2007

 

'Business-friendly' tax plan mat not have intended effects

On September 25, 2007, Governor Bill Ritter proposed a change in the corporate tax code that would allegedly boost the Colorado economy by encouraging “export” businesses to locate in Colorado. The current tax code makes it unattractive for multi-state businesses to locate here because it taxes based on the amount of capital investment and the size of the payroll, instead of instate sales. Ritter’s plan would simply change this so that instate sales were the tax base.

So, from what I can make of it, the plan would change the tax base from capital and operating costs to gross income. Ritter claims this plan would bring in more businesses and boost the Colorado economy by creating more jobs. But it seems to me that Ritter’s plan may not have the effect it intends to: that is, create jobs. True it will encourage businesses that do most of their sales out of state to move to Colorado. I’m sure Colorado has some lack of such businesses, because of its current tax code, so undoubtedly it will bring more of these types in.

But what about the businesses who do most of their sales in state? These companies, I imagine, rather enjoy the current tax code. After this tax plan passes, as Ritter claims it certainly will, these businesses might see a rise in tax payments because the source of those payments will change to a base of larger volume. They’ll probably try to weather the new costs by increasing their prices, so the Colorado consumer will ultimately be affected.

Of course, I’m sure Ritter thinks (if he has considered it, that is) this decrease in business activity will be more than offset by the forthcoming ‘boost’ in jobs from the ‘export’ companies. But they may not move in immediately. Furthermore, they will probably bring in quite a few out-of-state employees, because it is easier for multi-state businesses to draw employment this way. I would say there will be no significant increase in jobs, at least in the short run, because so many new employees will come from out-of-state that original Colorado residents won’t see much change. Furthermore, the increase in taxes will raise prices, which will affect quantity demanded and thus eat into in-state sales, which may possibly cause job cuts in those businesses currently favored by the tax code. This is a good example of politically motivated public policy that is made without careful consideration for its actual economic effects.


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