State tax policy has only a modest effect on entrepreneurship rates, according to a report released by the Small Business Administration’s Office of Advocacy.A new analysis by professors at the University of Tennessee and Creighton University takes into account tax rates, as well as the type of taxes in a state’s portfolio, to reach the conclusion. “State Tax Policy and Entrepreneurial Activity” looks at detailed tax policy information from 50 states, spanning from 1989 through 2001.

According to the SBA, the report includes the first known analysis of the effects of state tax portfolios (the share of state tax revenues generated by various major taxes) on entrepreneurial activity. The report also examines each state’s entrepreneurial stock in order to understand how state tax policy fosters entrepreneurship within a state and finally, explores the importance of using alternative measures of entrepreneurial activity.

Among the report’s key findings:

  • Higher top tax rates on individual income, higher sales tax rates, and the existence of a state-level estate, inheritance, or gift tax above the federal estate tax all tend to slightly reduce a state’s share of the national entrepreneurial stock;
  • While top marginal state tax rates on corporate and individual income do not have statistically significant effects on state entrepreneurship rates, states with higher sales tax rates tend to have higher entrepreneurship rates;
  • States with combined reporting and throwback rules as part of their corporate income taxes tend to have higher entrepreneurship rates -- above and beyond changes in organizational form among small businesses; and,
  • The composition of state tax portfolios is generally not a significant determinant of state entrepreneurship rates.

The full report is available at www.sba.gov/advo/research/rs284tot.pdf.

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