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States in Fierce Competition Over Tax Reform

Just as countries vie with one another to be agreeable places in which to do business by having congenial tax rates, U.S, states have come to realize that in order to attract jobs and diversify revenue, they too, must adjust their tax structure accordingly. Long having struggled to attract business and diversify its economy, New Mexico recently passed a tax reform package which will likely cause nearby states like Arizona, California and Nevada to take notice and possibly rethink their own efforts at reform. Texas’ governor Rick Perry, who runs a fairly low-tax state environment, is calling for even more reductions.

According to a report by The Financial Times, the New Mexican legislation cuts the corporate income tax rate from 7.6 per cent to 5.9 per cent, phasing it in over five years. The proposal does not go as far as the recent corporate tax cut to 4.9 per cent over time in adjacent Arizona, or plans in Louisiana – which are now on hold – to scrap income tax completely. The corporate income tax reduction is only one part of the package – the other main provision being the switch to a so-called “single sales factor” for manufacturers that allows corporate taxes to be levied only on their sales in the state, rather than an average of sales, payroll and property.

The FT further reports that this perk has gained traction across US states in recent years, including in Oregon, which passed a 30-year guarantee specifically designed for Nike, the sportswear maker, to keep its single sales factor in place. In New Mexico, Intel, which employs more than 3,000 people, lobbied fiercely for the change.

Nearby in Texas, the Associated Press reports that the legislature in Austin passed House Bill 3390, which allows school districts and counties to continue to grant property tax breaks to attract local investment. In the near future, the House will consider at least $410 million in credits and exemptions to the state franchise tax, one of the most maligned sources of Texas state revenue. The Republican-controlled legislature, has called for more reductions. Gov. Rick Perry wants $1.6 billion in tax relief, but has left how to reach that number to lawmakers.

Meanwhile, New Mexico tightened tax-reporting rules for big-box retailers, but softened the blow for Walmart, including an exemption for those establishing large distribution centers in the state.

“The entire package was passed as an amendment to a special tax incentive measure for the film industry specifically designed to attract television series productions after the success of Breaking Bad, the story of a teacher-turned-crystal methamphetamine producer filmed almost entirely in Albuquerque.”

Business groups in New Mexico say the change will improve the state’s prospects, while critics maintain that the gap—a relatively small 2 percent of state revenue—will have to be made up with spending cuts.

New Mexico has some of the lowest educational standards in the country, coupled with high rates of poverty and income inequality – despite an unemployment rate of 6.9 per cent, which is below the national average, according to the FT. Susana Martinez, the 53 year old Republican governor is part of a wave of conservative state governors trying – with mixed fortunes – to cut business taxes to attract and retain investment. “We have great weather – we have great people,” she told the FT. “We have a diverse environment and landscape. We just have to make sure they start to look at us as a place to bring their companies.”

Read: http://www.ft.com/cms/s/0/f29ebe5a-a6b6-11e2-885b-00144feabdc0.html#ixzz2Rxi7fv00

For more on state competiveness see Chief Executive’s special report: “2013 Best and Worst States for Business” in the May/June 2013 issue

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