08 Jan High taxes and low rates of entrepreneurship – is there a relationship?
Madison, Wis. – Ask a Wisconsin entrepreneur what’s vital to the success of his or her business, and you’re as likely to get a shopping list as a definitive answer. Finding and keeping the right employees, affording health insurance, protecting intellectual property, and cutting through government red tape are common replies.
Holding down taxes? That’s on the short list, too, but where it falls in the pecking order depends on the entrepreneur. Those who aren’t yet turning a profit may not be worried about corporate income taxes, although that day will come as they grow. Those who don’t own their office, laboratory, or plant might not gripe about property taxes – even though they’re paying them indirectly if they rent or lease.
Holding down state and local taxes is a factor in establishing a healthy entrepreneurial climate, but how important are they within the overall mix? That question deserves closer inspection as Gov. Jim Doyle and the Wisconsin Legislature look ahead to setting state government’s 2007-2009 budget.
The prospect of a $1.6 billion deficit could cause some policymakers to reach, ever so slowly, for the panic button. With the state’s economy more or less humming along, they might ask, would anyone really notice if selective taxes were raised here or there to help close the gap?
Entrepreneurs and small businesses would notice, for starters, as well as those who invest in those companies. Anything that raises the cost of doing business is likely to be greeted like a past-due invoice by entrepreneurs, even if taxes aren’t first on their worry list.
Taking entrepreneurial stock
There is some evidence to suggest that Wisconsin would have more entrepreneurs if state and local taxes here were lower. A recent study for the U.S. Small Business Administration concluded that “higher top tax rates on individual income, higher sales tax rates and the existence of state-level inheritance or gift taxes all tend to slightly reduce a state’s share of the national entrepreneurial stock.”
In that study, led by Donald Bruce of the University of Tennessee and John Deskins of Creighton University, Wisconsin came across as having above-average taxes and below-average entrepreneurial scores for the period between 1989 and 2001. While Bruce and Deskins were careful to say state and local taxes appear to be a marginal factor, they also noted “states with larger state governments, as measured by state taxes per capita, tend to have lower entrepreneurial shares.”
The non-partisan Wisconsin Taxpayers Alliance recently reported that federal, state, and local taxes claimed 33.4 percent of personal income in the state in 2006 – up from 33.1 percent the year before. While that’s a fractional increase mitigated in part by salaries that rose at an above-average rate, it also suggests a tax increase would not go unnoticed by most citizens.
The case for increasing a major tax, such as income or sales, is not compelling from a budget-balancing perspective. The projected gap in what state agencies want to spend and what revenues are available equals about six percent of the $26.4 billion the state expects to raise over the next two years. Doyle and lawmakers will work to hold down costs, revenue estimates might improve, and the deficit will narrow. The starting point of $1.6 billion is about half of the projected deficit two years ago.
If anything, Doyle and lawmakers may agree to cut taxes on activity that spurs entrepreneurship. Expanding tax credits for angel and venture capital investors who invest in high-tech or high-growth start-up companies is one idea. Another is providing a capital gains tax exclusion for investment gains that are plowed back into high-growth Wisconsin companies.
State and local taxes might not be the first complaint by Wisconsin entrepreneurs, but neither is it the last. Stay away from the panic button. The deficit is best relieved by smart budgeting and a growing economy – which includes more entrepreneurs who are starting companies and creating jobs.
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