December 19, 2012

Tax Rates DO Matter

Driving to work today, I was listening to 101Espn (the station I listen to when I am not listening to Show-Me Institute Policy Analyst David Stokes on McGraw) and heard an ad about the tax advantages of buying cars in Illinois versus Missouri. The ad even urged the listeners to go online and check the tax savings available if they buy their new car in Illinois.

This ad exists because of a loophole allowing Missouri drivers to buy cars out-of-state without paying a local sales tax.  Now, I am not really a fan of tax loopholes. My displeasure borders on rage. However, the key point here is that taxes affect people’s decisions. We have seen that low excise taxes on gas, cigarettes, and alcohol in Missouri encourage people to buy these products in Missouri.

If it is worth buying ads to promote the fact that you will not pay a local sales tax if you buy a car in Illinois, then the tax advantages of moving an entire business to a new jurisdiction can be even more pronounced. That is why the Kansas tax cuts matter. By eliminating its tax on pass-through entities, Kansas made itself more attractive to businesses looking to gain any advantage it can in a competitive marketplace.

Missouri does not have to stand idly by while its neighbors continue to make themselves more attractive to businesses. In a forthcoming essay, Patrick Ishmael and I lay out the need for the state to eliminate the tax on pass-through entities.

A zero local sales tax liability matters so much that a car dealership believes that it is worth purchasing ads. How much are competitive tax rates worth to the entire state? If Missouri wants to compete, it should have a tax structure that allows it to do so.

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