More About Michael Mazerov

Michael Mazerov

Mazerov joined the Center staff in January, 1998. He is a Senior Fellow with the Center's State Fiscal Project.

Full bio and recent public appearances | Research archive at

More Evidence That You Can’t Lure Entrepreneurs With Tax Cuts

February 14, 2014 at 11:42 am

Cutting state taxes to attract entrepreneurs is likely futile at best and self-defeating at worst, a new survey of founders of some of the country’s fastest-growing companies suggests.  The study, which is consistent with other research, should be required reading for state policymakers — especially those in Michigan, Missouri, Nebraska, Ohio, Oklahoma, South Carolina, and Wisconsin who are pushing for large income tax cuts.

The 150 executives surveyed by Endeavor Insight, a research firm that examines how entrepreneurs contribute to job creation and long-term economic growth, said a skilled workforce and high quality of life were the main reasons why they founded their companies where they did; taxes weren’t a significant factor.  This suggests that states that cut taxes and then address the revenue loss by letting their schools, parks, roads, and public safety deteriorate will become less attractive to the kinds of people who found high-growth companies.  (Hat tip to urbanologist Richard Florida for calling attention to the study.)

As I wrote last year on why studies show state income tax cuts aren’t an effective way to boost small-business job creation, “Nascent entrepreneurs are not particularly mobile.  Rather, they tend to create their businesses where they are, where they are familiar with local market conditions and have ties to local sources of finance, key employees, and other essential business inputs.”

I also argued that state tax cuts could be counterproductive, impairing states’ ability to provide high-quality services that make a state a place where highly skilled people want to live.

The new survey provides further evidence for these arguments.  It found that:

  • “The most common reason cited by entrepreneurs for launching their business in a given city was that it was where they lived at the time.  The entrepreneurs who cited this reason usually mentioned their personal connections to their city or specific quality of life factors, such as access to nature or local cultural attractions.”
  • “31% of founders cited access to talent as a factor in their decision on where to launch their company. . . .  A number of founders also highlighted the link between the ability to attract talented employees and a city’s quality of life.”
  • “Only 5% of entrepreneurs cited low tax rates as a factor in deciding where to launch their company” and only 2% mentioned “business-friendly regulations” and other government policies.  The report’s authors concluded, “We believe that the lack of discussion of these factors indicates that marginal differences in these areas at the state or municipal level have little influence on great entrepreneurs’ decision-making processes.”

Kansas, North Carolina, and Ohio have cut personal income taxes significantly in the last two years, and in each case the governor argued that it would give a big boost to creating or attracting new firms.  This new study provides more compelling evidence that that’s the wrong approach.  Let’s hope other states don’t start down the same dead-end path.

More Business Tax Cuts Not the Ticket to Growth for New York

January 9, 2014 at 1:29 pm

New York Governor Andrew Cuomo’s proposed business tax cuts — part of a $2 billion tax-cut package he outlined this week — would have a negligible impact on economic growth and job creation and would make it harder to fund education, roads, and other critical services that make the state a desirable place to do business.

In an attempt to “attract and grow businesses across the state,” Governor Cuomo proposes cutting the corporate income tax rate from 7.1 percent to 6.5 percent and making some other technical changes (costing $346 million a year), creating a refundable property tax credit for manufacturers ($136 million), and eliminating the corporate tax for manufacturers in upstate New York ($25 million), for a total annual revenue loss of $507 million.

But New York already has deeply cut corporate taxes on manufacturers in general and upstate manufacturers in particular.  In 2007 it adopted “single sales factor apportionment,” which sharply reduces or even eliminates corporate income taxes on manufacturers that sell most or all of their goods outside the state.  Moreover, nearly all large manufacturers in New York already pay corporate income tax at the 6.5 percent rate, and most small upstate manufacturers pay at a 3.25 percent rate.

As a result, the proposed rate cut and other corporate tax “reforms” would primarily benefit major Wall Street banks and other service businesses, not the manufacturers that Governor Cuomo cites in his call for new tax cuts.

Every state has lost manufacturing jobs since 2007, but New York has ranked in the bottom ten states in retaining manufacturing jobs even though its total taxes on manufacturers are well below the national average, according to the conservative Tax Foundation.  This is further evidence that cutting state and local business taxes doesn’t have a significant impact on how many jobs businesses create or where they put them.

The reason is simple:  state and local taxes represent a very small share — no more than 3-4 percent — of the average corporation’s total expenses.

Labor, energy, transportation, building construction, and similar location-specific costs are much more significant expenses for corporations, and they often vary among states far more than state and local taxes do. They therefore have a much bigger impact on where businesses create jobs.

A vast body of research backs this up, finding overall that cutting state and local business taxes by 10 percent — more than ten times the governor’s proposal — produces no more than a 3-4 percent gain in jobs after a decade.  And even that small impact assumes that the tax cuts don’t result in cuts in public services that businesses value, like high-quality education and good roads and bridges.

Frittering away half a billion dollars a year on new business tax cuts, despite the lack of evidence that previous tax cuts have worked, might send a symbolic message that the state is “business friendly” but would have little real impact on the state’s economic performance.  New York can put the revenue to other uses — enabling more kids to get into pre-K programs or displaced workers to get retraining in community colleges, for example — that would do much more to enhance long-term growth.

Supreme Court Opens Door Wider for Collecting Internet Sales Taxes

December 3, 2013 at 11:48 am

By declining to hear a challenge to New York State’s “Amazon law,” the U.S. Supreme Court has now helped pave the way for states and localities to collect more of the roughly $13 billion that they’re owed each year in uncollected sales taxes on Internet purchases.  That should encourage other states to pass similar laws, though only federal policymakers can solve the problem comprehensively.

First, some background.  Previous Court decisions held that a merchant must have a “physical presence” — generally, employees or facilities — in a state before that state could require the company to charge sales taxes to its customers there.  Although buyers are legally obligated to pay directly to their states any applicable taxes that the merchants don’t charge, very few do.

But the Court has also said that people who aren’t employed by the merchant but help market its goods constitute a “physical presence.”  So, New York enacted a law requiring Internet merchants with in-state “affiliates” to charge sales taxes on all taxable sales to New York customers.  “Affiliates” are companies and individuals that link to an Internet retailer from their own site and receive a commission when someone clicks on the link and buys something on the merchant’s site.

Amazon and Overstock, two of the many large retailers that operate affiliate programs, challenged New York’s law.  But New York’s high court upheld the law, and yesterday the U.S. Supreme Court let that decision stand.

More than a dozen states (including New York) have enacted laws requiring Internet retailers with in-state affiliates to charge tax on all taxable sales in the state (see map).  Now that New York’s law has withstood all legal challenges, other states may follow its lead.  Amazon laws can chip away at the problem even if they don’t represent a full solution, I’ve explained.

A federal law that empowered states to require all sellers to collect sales tax would:

  • Help states and localities maintain public services and possibly reinvest in services they cut during the recession — rehiring teachers, freezing college tuition increases, and boosting road and bridge maintenance, for example.
  • Create a more level playing field for local store-based retailers, which do collect sales taxes.
  • End the unfair sales tax treatment of consumers who don’t shop online, including low-income people who lack computers, Internet access, or credit cards.

The federal Marketplace Fairness Act, which represents a fair and comprehensive solution to the problem of uncollected tax on Internet and other interstate sales, passed the Senate in April but is stalled in the House.  Until it moves, states need to do what they can to address the problem themselves.  The Supreme Court has now cleared a big obstacle in their paths.

More Evidence That State Tax Breaks Won’t Save Jobs

September 17, 2013 at 9:04 am

Intel Corporation, the world’s largest maker of computer microprocessors, announced on Friday that it was eliminating 400 jobs at a New Mexico plant, just six months after pushing successfully for large corporate tax cuts there.  It’s just the latest example of why it’s not smart to use state tax breaks to try to influence corporate location decisions.

As this CBPP report shows, Intel has lobbied successfully for one tax break in particular, known as “single sales factor apportionment,” in every state where it has a major presence.  Single sales factor will virtually eliminate the company’s corporate income tax liability in New Mexico, as it likely has in Oregon and Arizona, its other two major U.S. production locations.

While the New Mexico plant will stay open, Intel also announced last week that it is shutting down its chip-making plant in Hudson, Massachusetts, eliminating 700 jobs.  Massachusetts also grants single sales factor apportionment to manufacturers, and, like New Mexico, gave Intel substantial property tax breaks as well to try to keep it in the state.

I’ve written extensively about why single sales factor is a costly and ineffective tax incentive, citing several examples of companies that pushed for it in various states and then promptly downsized or shuttered their facilities there.  But what happened last week in New Mexico and Massachusetts illustrates a much larger point.  Corporations will make their investment and location decisions on the basis of economic and strategic factors, so it’s unwise for states to forgo badly needed revenues to try to influence them.

Instead, states should focus on their fundamental responsibilities:  investing in education, health care, infrastructure, good recreational facilities, and other services that make a state a place where businesses can find well-trained and productive workers who want to raise their children there.

It was especially sad to see New Mexico take the other route earlier this year, given that it ranks near the bottom of numerous measures of student achievement.  And, as my colleagues showed just last week, it has cut K-12 education funding quite deeply over the last six years.

It’s not too late for New Mexico to reverse course and suspend or reverse its recent tax break, which it is still phasing in.  But, regardless of what happens there, other states should learn from New Mexico’s unfortunate example.

State Legislators’ Task Force Gets It Right on Taxation of Online Hotel Bookings

August 19, 2013 at 3:16 pm

For many years, online travel companies (OTCs) like Expedia and Priceline have avoided paying the appropriate amount of state and local sales and lodging taxes on hotel rooms they book.  The companies calculate tax only on the wholesale room rate they pay the hotels, not the higher retail room rate they charge consumers.  Now, a National Conference of State Legislatures’ (NCSL) committee rightly is calling for an end to the practice.

Local governments have taken the lead in trying to close this loophole.  They’ve brought dozens of lawsuits against the companies, many of them still working their way through state courts.

The states have lagged behind, even though they, too, are losing substantial sales and lodging tax revenues.  This could change, however, as a result of a policy resolution adopted last week by a key NCSL committee calling on the states to consider changing their laws to require “OTCs to remit taxes based on the full rental price paid by the user.”  The full NCSL Executive Committee is likely to approve this resolution at its October meeting.

As I explained in an April 2011 report, there is no merit to the OTCs’ claims that hotel taxes should only apply to the wholesale room rate they pay hotels rather than the retail room rate they charge consumers.  Consider, for example, that if a consumer uses a conventional travel agent to book a room, the tax is calculated on the retail room rate, not the room rate minus the travel agent’s commission.

This loophole costs states and localities between $275 million and $400 million in hotel tax revenues each year.  Collecting that revenue won’t solve their budget problems, of course, but it could help states reverse some cuts in financial aid for college students, put their pension funds on more solid footing, or invest in infrastructure maintenance that they’ve deferred.  It will also ensure a level playing field for hotel chains, who want to use the OTCs to help them market their rooms but shouldn’t have to pay a disproportionate share of lodging taxes.

NCSL should be commended for taking a firm stand on the issue.  It’s time for the states to update their laws and close this loophole once and for all.