Statistics Can Be Taxing

Is Nevada a good home for small businesses? Depends on how you look at the numbers.

Location Matters, a recent study from the Tax Foundation, has a love-hate relationship with Nevada. The conservative anti-tax group sees the state as a great place for retail businesses, which enjoy a total tax burden about 40 percent below the national average. That’s good enough for third place among the 50 states.

But Nevada ranked in the bottom five for newer manufacturing businesses and call centers. The study says these types of companies face a high tax burden in Nevada because of the state’s high unemployment taxes, high sales tax rates and taxes levied on equipment. So has Nevada’s longtime low-tax model suddenly become onerous for certain businesses?

Studies like this can be misleading, says economist and UNLV professor Stephen Brown, who has done his share of research on the state’s tax structure. Brown says the Tax Foundation’s unemployment tax gripe is a product of the times, and not much can be done about it until the unemployment rate drops. Moreover, such studies are often simplistic in the way they run through a region’s most recent data. In this case, Brown says, stressing the unemployment tax in the heart of a historic recession is short-term thinking that skews the rating. And if the ratings wind up dissuading businesses from coming to the state, they only aggravate the employment problem. “You’re sort of kicking people when they’re down,” he says.

The study serves up some ironies on the sales-tax front, too. It’s true that businesses may shoulder higher sales-tax costs when purchasing supplies and materials. But there’s a worthwhile tradeoff: If you bring your company here and decide to live here, you (and your workers) will enjoy Nevada’s nonexistent state income tax and low property taxes. These low taxes create more spending power, too, which is good for the overall economy.

In the end, the Tax Foundation study is a classic case of statistics saying whatever one wants them to say. Another study, the Small Business & Entrepreneurship Council’s Business Tax Index 2012, ranked Nevada the third best tax system in the nation for entrepreneurship and small business. It, too, looked at sales taxes, but clearly didn’t make them a huge factor in its final analysis. On 18 separate tax categories, sales tax was ninth in importance, while personal income tax rates, corporate income tax rates and corporate capital gains were given top priority.

These studies also fail to look at factors beyond taxes that may influence whether a company decides to set up shop here. In his 2005 book, Grading Places, Peter Fisher, research director for the Iowa Policy Project, says sources like Forbes and other publications geared toward helping businesses make decisions offer a more comprehensive look at issues related to business relocations. Companies are primarily focused on matters such as labor-force quality, education, wage rates and health care. The best studies look at all these factors, in addition to taxes, and allow the business owner to prioritize them, not the publishers.

When it comes to a company’s decision to relocate, Nevada’s troubled K-12 education system is probably a bigger issue than taxes, Brown says. And if a company wants an educated workforce, quality health care, high scores on the quality-of-life index and minimal taxes—well, good luck.

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