Changes to state taxes have little influence on business location decisions, the creation of small businesses or other economic activity, according to Increasing the Income Tax Won't Hurt Colorado's Economy, an analysis released by the Colorado Center on Law and Policy, Bell Policy Center and the Colorado Fiscal Institute. Other factors, like how the nation is faring economically and how much consumers are spending, are far more important to the economic health of states.
"An extensive body of academic research clearly shows that state tax rates have little to no effect on economic growth," said Rich Jones, director of policy and research at the Bell Policy Center. "In fact, targeted tax increases that finance better quality education strengthen the economy. Amendment 66 will help ensure we produce the type of well educated workers businesses need."
The study, Increasing the Income Tax Won't Hurt Colorado's Economy, finds that:
- State tax levels only have a minor effect on economic growth.
- Businesses do not make location or relocation decisions based on state and local taxes, in part because they make up a very small portion of business costs.
- Businesses are far more likely to consider access to suppliers, labor costs, the quality of the workforce and the reliability of public services like schools, transportation, and public safety when making important decisions about their companies.
- Taxes also have a minimal effect on the creation of small businesses in a state. States that have income tax rates that rise along with income - another feature of Amendment 66 - actually had increasing rates of entrepreneurship, according to a nationwide study.
- National economic trends have a greater impact on Colorado's economic growth than state-level tax policies. Colorado's income growth closely tracks national income growth, not changes in the state income tax. Economic growth in Colorado has fluctuated whether the highest individual tax rate was 8 percent or 4.63 percent.
- Colorado has very little control over the national economy. However, state policymakers have a lot of control over education, and investing in education can have widespread economic benefits for all, such as higher median wages, stronger personal income growth and increased business investments.
This is the second installment in a three-part series outlining the economic benefits of Amendment 66. The first issue brief (Investing in education will boost Colorado economy) showed that investments in education actually spur economic growth. The final brief will demonstrate how Amendment 66 will improve our state tax system.
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