State Business Tax Climate: How Should It Be Measured and How Important Is It?

by Robert Tannenwald
January/February 1996

States are more concerned than ever before about their business tax climate. Over the past two decades, profound technological and political changes have enhanced employers' geographic mobility and extended their geographic range, thereby intensifying economic competition both within the United States and throughout the world. This study ranks the business tax climate of 22 states, including the six within New England. It finds only modest differences in business tax climate among most states. Within the region, New Hampshire and Massachusetts have the most attractive business tax climates.

The study also estimates the importance of business tax climate in determining where manufacturers invest in plant and equipment. Business tax climate exerts only a small, highly uncertain effect on such investment. States may be more likely to stimulate their economy by enhancing public services valued by business.

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