Saturday, February 23, 2013

I'll Take the Credit

3 years ago, I started watching this TV show called Archer. And after the show ended, I remember watching this 2 second clip where you see this peach, the state symbol of Georgia, and a voiceover that said "made in Georgia". I didn't really think too much of it at the time and promptly forgot about it until next year, when I started watching The Walking Dead and read that the show was shot in Atlanta. And then I watched the second season of Archer and saw the same clip with the same voiceover.

Growing up, I had the distinct impression that most shows were filmed and produced either in Los Angeles or New York, as those were where the major studios and production companies were located. But, increasingly, high taxes and regulations pushed productions out of those two main locales to other places. And I found out that, in 2008, the state legislature crafted one of the country's most generous film production tax credits into law. Since that period, a number of TV shows and movies moved their operations here. Archer and The Walking Dead were just two of them. A comprehensive list can be found here, and there are more than a few surprises on there.

The reason why I bring this is up is because I wanted an easy, accessible example to show how tax rates and incentives affect behavior. Lower taxes attract businesses, because they would be able to make more in profit than they would if all other things were kept equal. This might be a no-brainer moment for many people, but you'd be surprised on how differently states have acted since the recession left most state treasuries bare.

2 years ago, Illinois Governor Pat Quinn signed one of the largest tax increases in Illinois history, raising tax rates 66%. The top rates for personal income increased from 3% to 5%, while the top rate for corporate net income increased from 4.8% to 7%. It doesn't sound like much, but other governors have placed billboard spots, radio ads, and television commercials in the state urging businesses to relocate their operations to states like Wisconsin and Indiana.

Now, an individual isn't going to move across state lines if taxes reduce his take-home pay by 2%. But companies, many of whom have interstate operations, think on the margin. And if Illinois increases its tax rate and a state like Indiana cuts its tax rate in response, it makes a future expansion in operations more likely to occur in Indiana than Illinois, all other things equal.

But all other things aren't equal. Illinois has the second worst credit rating out of the 50 states in the union due to its extraordinary spending obligations, particularly in state employee compensation packages. The worst state? California. And California recently implemented tax hikes in order to repair its own budget deficit. The vast majority of states have tax revenue comprise from 12 to 20% of the state's GDP. California and Illinois both ring up in the upper register of 17-18%. And now they're asking their taxpayers to shoulder an even higher burden while other states cut tax rates and deregulate in an effort to lure other out-of-state workers and companies.

At the time of this writing, California currently has an unemployment rate of 9.8%. Illinois has an unemployment rate of 8.7%. Both are significantly higher than the national average of 7.8%. The last thing these states should have done would be to increase taxes on those individuals and businesses that employ the state's population. Because they sure aren't using the extra tax revenue to employ individuals in the public sector.

In national politics, Democrats and progressives are fond of saying that the Federal government has a revenue problem, not a spending problem. But in high tax states like Illinois and California, no similar argument can be made.

Tax rates and credits matter. And businesses are expanding in areas that offer them the lowest tax burdens, whether through rate reductions, credits, or both. The small government idealist within me would like to see only rate reductions instead of targeted credits, but as long as tax rates are low, I'm happy.

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