Taxes and the economy of Texarkana - UALR

Transcription

Taxes and the
Economy of
Taxes
and the
Economy
Prepared by
Dr. Michael R. Pakko
Chief Economist and State Economic Forecaster
(501) 569-8541 • [email protected]
Institute for Economic Advancement
University of Arkansas at Little Rock
2801 South University Avenue
Little Rock, AR 72204-1099
(501) 569-8519 • www.iea.ualr.edu
July 2011
IEA Publication Number 11-02
of
Contents
Taxes and Economy of Texarkana, AR-TX
1
Taxes and Firm Location
2
Demographic and Economic Characteristics of Texarkana
2
Tax Foundation Rankings
5
Personal Income Taxes
5
Property Taxes
6
Sales Taxes
7
Business Income Taxes
9
Arkansas Corporate Income Tax9
Texas Margins Tax9
Comparing Arkansas and Texas Business Taxes11
Marginal Tax Rates and Incentive Effects14
Apportionment Issues15
Tax-Abatement Incentive Programs
15
Summary and Conclusions
17
References:
19
20
APPENDIX: Additional Tables and Figures
Table A: Annual Average Sales, Income & Expenses of Corporations20
Figure A: Arkansas Corporate Income Tax Form22
Bowie County, TX
Miller County, AR
Arkansas
City of Texarkana
Texas
Texarkana, AR
Miller County, AR
Texarkana, TX
Bowie County, TX
Taxes
and the
Economy
M
of
As described in this report, significant differences
remain. In particular:
any metropolitan areas include areas on
both sides of a state line. Few, however,
are as intimately linked as the cities of
Texarkana, Arkansas and Texarkana,
Texas. Besides sharing a name, the two cities also
share a main road, State Line Avenue, which leads to a
downtown Federal Building that literally straddles the
state line. With no significant natural or geographic
boundaries, the Texarkana metropolitan area, with its
two co-principal cities, is a unique dual-state entity.
• The structure of Arkansas’ Texarkana
income tax exemption has affected the
pattern of business and residential growth
on the Arkansas side of the state line.
• Property taxes are lower in Arkansas,
providing incentives for households and
firms to locate on the Arkansas side.
The state line that divides Texarkana, AR from
Texarkana, TX may be invisible, but its impact is
certainly perceptible when it comes to the potential
for economic development. Texas and Arkansas have
differing tax structures, and both economic theory and
empirical evidence suggest that tax considerations
are influential factors in the location decisions of
households and businesses. This study documents
some of the differing characteristics of economic
activity on the Texas and Arkansas sides of the
Texarkana metro area, and suggests some features
of the tax structure of the two locations that might
contribute to these characteristics.1
• Sales taxes are lower on the Texas side, encouraging
retail activity on the Texas side of the line.
• The introduction of the Texas Margins Tax
has increased the tax burden on some Texas
businesses. It generally provides a lower
business-tax environment than the Arkansas
Corporate Income Tax. However, for some
particular types of businesses, there may be tax
advantages to locating in Arkansas. It has not
existed long enough to have had any substantial
influence on business and economic development,
and is unlikely to have a substantive impact
in the near future—at least in its current form.
Prospective changes to the Texas Margins Tax,
however, might affect the relative competitiveness
of business taxes on the two sides of the state line.
Residents of Texarkana are no strangers to the impact
of these divergent state laws on the development of the
local economy. In the past, differences between the
usury laws in Texas and those in Arkansas have been
blamed for driving many financial activities (including
auto dealerships) to the Texas side of the border.2 On
the other hand, residents of Texarkana, Arkansas have
been exempt from Arkansas state personal income
taxes since 1979, as a way of compensating for the fact
that Texas has no state income taxes.
• Enterprise Zone programs in the two states
have different emphases and priorities.
Texas’ program favors large capital projects
in impoverished areas, while Arkansas’
supports expansion of existing concentrations
in manufacturing and transportation.
1
This study makes no attempt to evaluate or measure causality between the tax structure and economic characteristics of Texarkana. Rather, it serves
as a case study positing specific examples of economic effects that have been hypothesized and tested more generally in the academic literature.
2
Greene (2002).
Taxes and the Economy of Texarkana
- 1 -
Overall, the evidence suggests that for many
businesses, the tax structures of Texarkana, Arkansas
and Texarkana, Texas tend to favor business location
on the Texas side of the border. However, with a
personal income tax exemption and lower property
taxes, the Arkansas side of the border appears to be
more competitive as a residential location option.
statistically significant relationships between tax
differentials and business locations.4 In general, the
magnitudes of the effects are small – especially for
interregional location decisions. Access to markets
and raw materials, labor force availability, and other
intrinsic factors tend to be far more important. But
the consensus of the literature is that differences in
tax structure are more important when it comes to
intra-regional location decisions of firms.5 This makes
Texarkana a likely location for observing such effects.
Taxes and Firm Location
In theory, taxes can be an important factor in the
location decisions of both households and firms. For
households, the location decision is presumed to
include the mix of taxes and government services,
along with other intrinsic amenities. But for business,
taxes are considered to be particularly important
because they introduce price distortions that can erode
profit margins—the ultimate objective for the firm.3
Demographic and Economic
Characteristics of Texarkana
Table 1 displays some selected demographic and
economic characteristics of the Texarkana, TX-AR
metropolitan statistical area, which includes Bowie
County in Texas and Miller County in Arkansas. In
many respects, it is a very homogenous community.
Differences among the two cities and counties in
terms of income, education, employment, etc., are
small, and generally are statistically insignificant.6
The evidence of the influence of taxes on business
location decisions has been mixed. Early studies
found little evidence of an effect, but as more data
have become available and statistical methods
have improved, a growing body of literature found
 TABLE 1: Selected Demographic and Economic Characteristics
Arkansas Miller County
Total Population
Median Age (years)
Texas Texarkana City Bowie County Texarkana City
42,90829,988
91,61735,261
37.937.5
36.234.0
Percent High School Graduate Or Higher
80.4%
81.2%
82.9%
83.3%
Percent Bachelor’s Degree Or Higher
13.9%
17.1%
17.3%
21.5%
Total Housing Units
19,084
13,337
38,443
15,678
Home Value, Median (dollars)
83,300
84,700
84,500
88,800
Occupied Housing Units
Owner-Occupied
Renter-Occupied
16,249
11,431
33,521
13,525
10,5916,614
21,4396,787
5,6584,817
12,0826,738
Selected Monthly Owners Costs With A Mortgage - Median (dollars)
881
941
1,027
1,063
Without A Mortgage - Median (dollars)
287
294
349
378
Median Rent (dollars)
590
593
622
637
Median Household Income (dollars)
39,741
40,360
41,364
37,751
Mean Household Income (dollars)
50,850
51,308
56,956
56,562
Per Capita Income (dollars)
19,810
20,100
22,108
23,116
Source: U.S. Census Bureau, American Community Survey, 2006-2008
3
Papke and Papke (1986) point out “tax differentials, as in all other cost differentials, are important for location only to the extent they affect the
“bottom line” (i.e. profits); and, consequently, the appropriate measure for meaningful comparisons of tax burdens is the net after tax rate of return
on a marginal investment in alternative locations.”
4
Comprehensive literature reviews include Wasylenko (1997) and Ladd (1998).
5
Wasylenko (1997) summarized the literature as follows: “Intra-regional studies produce tax elasticities that are quadruple or more those found in the
interregional studies. With other cost and market variables very similar among different locations within a region, fiscal differences within the region
play a more significant role in location choice.”
6
That is, the Census Bureau reports margins of error (not reported here) that are, in many cases, larger than the differences shown in Table 1.
- 2 -
Figure 2 documents a feature of this populationgrowth surge: the distribution of housing stock vintages
on the two sides of the border. A higher proportion
of the houses in Arkansas were built in the 1990s and
the early-2000s as compared to the distribution of
Texas housing stock vintages. This is consistent with
the population growth trends shown in Figure 1.
Employment growth rates over the past decade
have followed a remarkably divergent pattern on
the two sides of the border. Figure 3 displays two
measures of employment for Miller County and
Bowie County: The Local Area Unemployment
Survey (LAUS) measures the number of residents in
each county that are employed, while the Quarterly
Census of Wages and Employment (QCEW)
measures the number of employees by location of
employment. Figure 3 shows a widening gap for
Miller County, with the number of people employed
in the county falling over time, and the number of
people living in the county and working elsewhere
(presumably, Texas) steadily growing over time. In
contrast, the Bowie County data show a widening
gap of employment growth in excess of labor force
growth during most of the last decade (although
it is clear that Bowie County employment has
suffered larger losses during the recent recession).
FIGURE 1: Population Growth Estimates
FIGURE 2: Housing Stock Vintages
The populations of the two cities are similar, with
Texarkana, Texas just having about 35 thousand
residents and Texarkana, Arkansas having about
30 thousand. However, Bowie County, Texas
has a total population more than twice that of
Miller County, Arkansas. As shown in Figure 1,
population growth in Bowie County was higher
than in Miller County for most of the 1980s and
1990s, but Miller County population growth has
been trending upward for two decades, and surged
ahead during much of the most recent decade.
Three-Year Moving Averages
2.5%
Annual Rates of Growth
2.0%
Miller County, AR
20%
Bowie County, TX
Texarkana, AR
Texarkana, TX
16%
1.5%
12%
Percent
1.0%
0.5%
8%
4%
0.0%
-0.5%
0%
-1.0%
1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
2005 or 2000 to 1990 to 1980 to 1970 to 1960 to 1950 to 1940 to 1939 or
later 2004 1999 1989 1979 1969 1959 1949 earlier
Year Built
Source: U.S. Census Bureau
Source: U.S. Census Bureau, American Community Survey,
2006-2008
FIGURE 3: Employment Patterns
22000
Miller County, AR Employment
QCEW (Establishment)
45000
LAUS (Household)
Bowie County, TX Employment
QCEW (Establishment)
LAUS (Household)
19000
43000
16000
41000
13000
39000
10000
2001 2002 2003 2004 2005 2006 2007 2008 2009
37000
2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: U.S. Bureau of Labor Statistics
- 3 -
Figure 4 shows that there are distinct differences
in the types of employment on the two sides of the
border.7 Employment in Miller County is more highly
concentrated in the goods-producing sectors. In
particular, employment in manufacturing constitutes
an employment-share well above the national average.
Employment on both sides of the metro area is more
highly concentrated in the broad category of Trade, and
Utilities, than the national average. Bowie County is
more highly concentrated in service-sector employment,
particularly Education and Health Services.
On the Texas side, 18 employers in the database
report more than 200 employees. The three
largest are in Health Services, indicating the
presence of a “cluster” in that sector. Fourth
place on the list is a Walmart Supercenter – the
only individual retail establishment to make the
list.8 The remaining employers listed feature
firms in Manufacturing, Government Services,
and Transportation and Warehousing.
TABLE 2: Largest Employers in
Texarkana, AR and Texarkana, TX
Within the category of Trade, Transportation,
and Utilities, Figure 4 includes location quotient
calculations for Retail Trade. Miller County has
a slightly below-average concentration in this
sector, while Bowie County employs a larger share
of its labor force in this sector than the national
average. Both counties are very highly concentrated
in Transportation and Warehousing. Location
quotients for this sector (not shown in Figure 4) are
3.67 in Miller County and 1.74 in Bowie County.
(> 200 employees)
Number of
Employees
Texarkana, AR
Cooper Tire & Rubber Co.
Smith Blair Inc 2000
300
Southern Refrigerated Transport
205
Texarkana, TX
Table 2 shows the largest employers on the two
sides of the state line (as listed in a database from
ReferenceUSA), illuminating some of the specific
reasons for the sector-concentrations in Figure 4.
The largest employer by far in Texarkana, Arkansas
is Cooper Tire. Only two other individual firms
listed in the database report employing more than
200 people; One is a manufacturer and the other
is in the Transportation and Warehousing sector.
Christus St Michael Health 1800
Wadley Health System 1050
Collom & Carney Clinic Assn 500
Walmart Super Center
480
Log Jams
450
Bi-State Justice Building
425
Texarkana College
425
TAC Energy
400
Alcoa Mill Products 365
Day & Zimmerman Inc
312
Ledwell & Son Enterprises Inc
310
Life Net EMS
301
Federal Correctional Institute
300
Lone Star Div
300
Bowie County Correctional Center
297
US Post Office
262
Defense Fin & Acct Svc
250
*Retail Trade is a component of the broader “super-sector” of
Trade, Transportation, and Utilities.
J&M Poultry
250
Source: U.S. Bureau of Labor Statistics
Source: ReferenceUSA
FIGURE 4: Location Quotients
(Industry concentrations relative to U.S. averages, 2008)
Natural Resources & Mining
Construction
Manufacturing
Trade, Transportation, & Utilities
Retail Trade*
Information
Financial Activities
Professional & Business Services
Education & Health Services
Leisure & Hospitality
Other Services
Miller County, AR
Bowie County, TX
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0
7
The Location Quotients (LQs) in Figure 4 represent the share of employment for various sectors compared to the average employment share in the
U.S. A number equal to one implies that the employment share in that sector is equal to the national average. Numbers greater than one indicate a
higher concentration of employment in that sector than the national average (and vice versa).
8
There is also a Walmart supercenter on the Arkansas side of the border. However, ReferenceUSA lists it as having fewer than 200 employees in 2010.
- 4 -
Tax Foundation Rankings
Personal Income Taxes
As a point of departure for looking at differences
in the two states’ tax structures, consider the State
Business Tax Climate rankings from the Tax Foundation,
displayed in Table 3. This index is constructed to
compare the business-friendliness of states based solely
on their tax structures. Lower rates matter, but the Tax
Foundation rankings also consider other factors such as
ease-of-compliance and economic efficiency.
To some extent, the state income tax exemption
for Texarkana helps to level the playing field when
it comes to tax differentials between the Texas and
Arkansas sides of the border. However, the exemption
itself imparts economic incentives that may have led to
unintended consequences for development in the region.
In particular, the exemption for residents of
Arkansas applies only to those who live within
the Texarkana city limits. As a result, there is a
distinct disadvantage to establishing a residence in
Miller County outside the city limits. The pattern of
population dispersion in Miller County is consistent
with this factor playing a role. Note that in Table
1, the population of Miller County is concentrated
in the city of Texarkana, with approximately 70%
of the county’s population residing in the city. In
contrast, the population of Texarkana, TX accounts
for only 38% of the population of Bowie County.
The overall rankings show that Texas ranked 13th
highest and Arkansas ranked 12th lowest for FY2011.
Both states ranked below the median in two important
categories: corporate taxes and sales taxes. Both
states ranked above the median for unemployment
insurance taxes. There are some interesting
differences in the categories of property taxes
(where Arkansas has the advantage) and individual
income taxes (where Texas has the advantage).
In fact, Texas’ ranking is boosted considerably
by its high score for having no individual income
tax. Because of the Texarkana exemption in
Arkansas law, this factor might seem to be
rendered moot—at least for residents of the city of
Texarkana, AR. Nevertheless, the limited nature
of the Texarkana exemption provides economic
incentives that are likely to have affected the
pattern of economic development in the area.
The personal income tax exemption also skews
incentives for business location decisions. The personal
income tax code tends to favor business locations
within the city because of the Arkansas income tax
exemption that applies to residents of Texarkana,
Texas. Texas residents who either work in the city of
Texarkana, AR or who reside in the city of Texarkana,
TX are exempt from Arkansas personal income taxes.
The choice to locate a business outside the city limits
in Arkansas therefore has the effect of restricting
the available tax-exempt labor pool from which to
draw employees. All else being equal, this should
be expected to raise the wages and salaries required
to attract workers to firms outside the city limits.
Personal income taxes, property taxes, sales
taxes, and business income taxes each have local
components, requiring a more detailed analysis of
specific conditions in Texarkana.9 These categories of
taxes will be examined in the following sections.
 TABLE 3: Components of the State Business Tax Climate Index for Arkansas and Texas
Individual Unemployment
Overall Corporate Tax Income Tax Sales Tax Insurance Tax Property Tax
Score Rank ScoreRank ScoreRank ScoreRank ScoreRank ScoreRank
FY2011
394.59
404.85
333.39
41 5.25 185.34
21
Arkansas4.55
Texas5.63
134.19
468.59
73.73
37 5.44
94.96
29
FY2007
364.56
364.76
333.67
39 4.49 355.95
11
Arkansas4.72
Texas5.99
105.35
179.44
74.17
30 6.09
64.49
36
9
The unemployment insurance tax structures for Arkansas and Texas are similar, with slightly higher rates in Arkansas accounting for the narrow
differences in the two states’ scores and rankings. These are purely state programs, with no specific local context. Moreover, there is little evidence
in the academic literature on the effects of differences in states’ unemployment insurance programs. A more detailed analysis of the topic is therefore
beyond the scope of this study.
- 5 -
The pattern of business locations in Miller County is
consistent with these incentive effects: The database
of business for Miller County from ReferenceUSA lists
a total of 1674 businesses in Miller County, with 1,521
(over 90%) located within the Texarkana city limits. In
contrast 3,512 of the 4,600 businesses in Bowie County
(about 76%) are located in the city of Texarkana, TX.
population growth on the Arkansas side of the border
that is disproportionate with job growth. Moreover, the
surge in residential construction in the 1990s and early
part of the 2000s suggests that the national building
boom during that period was more evident on the
Arkansas side of the border than on the Texas side.
One finding in the academic literature is that
property taxes can be particularly important for
business location decisions when property is taxed
at a higher rate for commercial purposes than for
residential use. This is not the case for either Arkansas
or Texas, so differences that do exist in property tax
rates across the border are unlikely to matter as much
for location choice than they do in other states.
Property Taxes
Property taxes are important for both households
and businesses. For households, taxes on
residential property can constitute a large share
of a family’s overall tax burden.10 Additionally,
localities and states often levy taxes on the personal
property or equipment owned by a business.11
TABLE 4: Tax on Property with
Assessed Value of $100,000
According to the Tax Foundation analysis, property
taxes accounted for 37% of total taxes remitted by
businesses in 2006. Since property taxes can be a
large burden to business, they can have a significant
effect on location decisions, a conclusion that is
supported by academic research on the topic.
Texarkana, Texas Taxable Value = Assessed Value: $100,000
Tax Rate
Tax
(Percent)
= Tax Rate * Value / 100
Bowie County
0.32700
Texarkana ISD
1.33900
Texarkana
0.58310
Texarkana College
0.09679
Total
2.34589
The Tax Foundation rankings use weighted averages
of local property taxes, finding that on average, property
tax collections per capita are $520 in Arkansas and
$1,393 in Texas. As a percent of income, the figures
are 1.86% for Arkansas and 3.59% for Texas. One
factor that lowers Texas’ score is the fact that property
taxes are assessed against intangible property and
inventories. Arkansas also imposes taxes on inventories
and its score is lowered by the presence of a real estate
transfer tax and a 0.3% tax on firms’ capital stocks.
327.00
1,339.00
583.10
96.79
2,345.89
2.35%
Texarkana, Arkansas Taxable Value = 20% of Assessed Value: $20,000
Tax
Mileage
= Millage * Taxable
Value / 1000
Table 4 compares property tax rates specifically for the
two sides of Texarkana. Direct comparison is complicated
by the fact that Texas property taxes are imposed directly
on assessed value, whereas the Arkansas property tax
rates are applied to 20% of assessed value. Table 4
shows the hypothetical tax bills for a property valued at
$100,000. In total, the tax rate on the Texas side of the
border is 2.35% compared to 1.10% on the Arkansas side.
That is, property taxes in Texarkana, Texas are more than
twice as high as property taxes in Texarkana, Arkansas.
General Fund
5
Debt Service Fund
2.5
Firemen’s Pension
1
Policemen’s Pension
1
Library
1
Miller County
School District
38.9
County
5.5
Total
54.9
778.00
110.00
1,098.00
1.10%
Nevertheless, the tax rates shown in Table 4 represent a
clear tax advantage for Arkansas, and it is likely a factor
in the pattern of residential development in Texarkana.
As observed earlier, there is an increasing trend of
Difference TX-AR
1,247.89
1.25%
100.00
50.00
20.00
20.00
20.00
Source: Assessors’ Offices of Miller County, Arkansas and
Bowie County, Texas.
10 Census Bureau statistics for 2008 show that property taxes account for more than 30% of all tax revenue for state and local governments in the U.S.
11 Mark, McGuire and Papke (2000) estimated that a tax hike on personal property of one percentage point reduces annual employment growth by
2.4 percentage points. Bartik (1985) estimated that a 10% increase in a state’s average business property tax rate results in a 1-2% decline in
the number of new plants. In a follow-up examining the location decision for small business start-ups, Bartik (1989), found that property taxes, in
particular, have a strong negative effect. Bartik speculates that property taxes are particularly important for small business formation because they
are owed regardless of the profitability of a business.
- 6 -
When it comes to very small differences in sales
tax rates, time and transportation costs are often
substantial enough to offset incentives to travel to the
low-tax jurisdiction for shopping. The differences
between tax rates on the two sides of the border in
Texarkana, however, are significant. The tax rate in
Texarkana, Arkansas is 17.6% higher than the tax rate
in Texarkana, Texas. This is large enough to give
some advantage to Texas as a preferred location for
retail business.
Sales Taxes
Although sales taxes are ostensibly paid by the
customer, the burden of the tax is shared between
the buyer and the seller. In a situation where
shopping alternatives are literally across the street
from one another, economic theory suggests that
demand is likely to be very elastic (price sensitive),
raising the share of the tax burden borne by the
seller. Sales tax differences should matter for
the location of retail firms within a region, and
evidence suggests that it does indeed matter.12
One reason that sales taxes matter for general
business location decisions is the fact that sales taxes
often apply to a firm’s purchases of equipment and
materials.13 The Tax Foundation report on Business
Tax Climate tracks the taxable/exempt status of 21
different categories of business spending. For most of
these categories, the sales tax treatment under Arkansas
law and Texas law are the same. Business expenditures
that are taxable in both states include office equipment
cleaning services, repair services, and custom software.
Categories that are taxable in Arkansas and exempt in
Texas include manufacturing machinery, utilities, and
motor vehicle leasing. Categories that are exempt in
Arkansas but taxable in Texas include downloaded
software and professional and personal services.
Table 5 compares the sales tax rates on the two
sides of the State Line Avenue in Texarkana. At
6.0%, the state sales tax in Arkansas is lower than the
6.5% rate in Texas. However, local option sales tax
rates are higher on the Arkansas side of the state line.
Texarkana, Arkansas also faces a special 1% sales tax
that goes to the state to compensate for the lack of
personal income tax revenue. Miller County collects
1.5% and the city of Texarkana, Arkansas adds on
another 1.5%, for a total sales tax rate of 10%. In
Texas, Bowie County sales taxes are only 0.5%, with
an additional 1.5% added on by the city of Texarkana,
Texas. As a result of these lower local tax rates,
the total sales tax rate on the Texas side is 8.5%.
The two states also differ with regard to some
business-to-consumer transactions that are taxable or
exempt. For example, groceries are exempt from sales
taxes in Texas, but are taxed at a reduced rate of 1½%
in Arkansas.14 Auto rentals are subject to sales taxes
in Arkansas, but not in Texas. Both states, however,
collect special excise taxes on motor vehicle rentals.
TABLE 5: Sales and Use Taxes in Texarkana
Arkansas Texas
Arkansas 6.00% Texas 6.25%
Miller County
1.50% Bowie County
0.50%
Texarkana City
1.50% Texarkana City
1.50%
Special State Tax*
1.00% Total Tax
10.00% Total Tax
In fact, motor vehicle rental taxes are one category
among many special excise and sales taxes that Arkansas
and Texas (along with many other states) impose in
addition to sales and use taxes. Some selected examples
of these special taxes are compared in Table 6.
8.25%
*An extra sales and use tax of 1% is collected by the state in
lieu of personal income tax.
Source: The Sales Tax Clearinghouse
 TABLE 6: Selected Excise Taxes and Other Sales Taxes
Motor Vehicle Leasing
Gasoline Tax Diesel Tax Cigarette Tax Restaurant Hotel ST (<30 days) LT (>30 days) (cents/gallon) (cents/gallon) (cents/pack)
Arkansas2%* 2%+3%* 10% 1.50% 21.8
22.8 115.0
Texas
-- 6%+7%*10% 6.25% 20.0 20.0 141.0
Mixed Beverage Distilled Spirits High Wine Low Wine Beer Ale & Malt Liquor
(sales tax) (cents/gallon) (cents/gallon) (cents/gallon) (cents/gallon) (cents/gallon)
Arkansas
14%258.077.227.2 23.422.0
Texas 14%240.040.820.4 38.139.0
12 For example, Mark, McGuire and Papke (2000) find that higher sales taxes are associated with a significant reduction in employment growth.
13 In his study of the location decisions of small businesses, Bartik (1989) found that the sales tax had the largest impact among all taxes considered,
particularly when the sales tax applied to the purchase of business equipment.
14 The grocery tax was reduced from 2% to 1½% as July 1, 2011.
- 7 -
Short-term motor vehicle rental taxes are
one of several special sales taxes that impact
visitors to the area. In both states, the tax rate
on rentals less than 30 days is 10%. In Arkansas,
auto rentals are also subject to sales taxes. For
rental contracts longer than 30 days, the rate is
equal to the state sales tax in Texas. In Arkansas
it is equal to the state sales tax plus 1.5%.
Hotel taxes are another example of taxes on
visitors: On both sides of the border, hotel
rooms are subject to both state and local hotel
occupancy taxes. In Texarkana, Texas the
occupancy tax is 6% state and 7% local, for a
total of 13%. In Texarkana, Arkansas the rate is
2% state plus 3% city, plus sales and use tax.
Other special excise taxes that are paid at the
retail point-of-sale include fuel taxes and cigarette
taxes. The tax on gasoline in Texas is 1.8 cents per
gallon lower than in Arkansas, and the Texas tax
on diesel fuel is 2.8 cents per gallon lower. For
cigarettes, Texas has the higher tax -- $1.41 per
pack compared to $1.15 per pack in Arkansas.15
Alcoholic beverages are a popular target of
special sales and excise taxes. For retail carryout, the Arkansas side of the metro area has a
clear advantage: being a wet county. Bowie
County, Texas is a dry county, allowing only
sales by the drink in licensed restaurants. For
competition between restaurants and hotels on
opposite sides of the border, the tax rates matter.
The excise taxes on alcohol shown in Table 6
include per gallon taxes and additional excise
taxes on cases and barrels that are collected on
the wholesale level. Arkansas has higher taxes
on wine and wine coolers. Texas has higher taxes
on beer and ale.16 Both states have a retail mixed
beverage tax. Although the mixed beverage
tax rate is the same on either side of the border,
the tax bases differ. In Arkansas it is the mixed
drink itself that is taxed – 14% on top of sales
tax. Sales of beer and wine are subject only to
the sales tax. In Texas, the tax per drink depends
on the type of license held by the seller. If the
seller has a mixed beverage license, all drinks
(including beer and wine) are subject to the 14%
tax. For holders of lesser licenses, beer and wine
are taxed at the regular sales and use tax rate.
Sidebar:
Another difference in state
Arkansas
regulatory structure that has long
Usury Laws
impacted business on the two
sides of the border – particularly
for the retail sector – is the
restrictive usury laws that are
written into the Arkansas constitution. Greene (2002)
cites the usury restriction as a fundamental obstacle to
retail development on the Arkansas side of the border.
The Arkansas restriction put a cap on the interest rate
that can be charged by all Arkansas-chartered banks
and finance company. The limit was five percentage
points above the Federal Reserve discount rate. So, for
example, in 2010 when the discount rate was 3/4%, the
maximum interest rate allowed in Arkansas was 5-3/4%.*
In practice, restrictive usury laws make it impossible
for small retailers and finance companies to offer credit at
all. When credit risk requires that all but the most creditworthy customers be charged rates above the usury cap,
the resulting equilibrium is characterized by no credit at
all. Federal law superseded the state restrictions for banks
and credit unions, but for retailers who wanted to offer
in-house financing to customers, the law was prohibitive.
This put a particular burden on retailers of durable
household goods and used car dealers (see Bell, 2011).
In November 2010, a ballot initiative to change the
constitution to allow higher finance rates passed. Assuming
that the amendment survives legal challenges, the new
limit on consumer finance loans is 17%. The retention
of any limit runs the risk that some potential customers
will not have access to credit, but the new threshold
will certainly expand opportunities –particularly in the
present low-interest rate environment. The relaxed usury
limits have been especially welcomed by small auto
dealers and furniture sales outlets. In the cross-border
metropolitan region of Texarkana, the new amendment
helps to level the playing field in the retail business.
*In 2003, the Federal Reserve changed the nature of the
Discount Rate. Prior to that year, the discount rate was the
rate charged on “adjustment credit,” and was set below the
market-determined federal funds rate. In 2003, adjustment
credit was replaced by “primary credit,” with a new interest rate
– the primary credit rate – that was set above the federal funds
rate. Arkansas law never officially recognized the change.
15 Arkansas also imposes a tax on soft drink sales of 21 cents per gallon. However, the tax exempts sales in “an Arkansas city or unincorporated town
which is divided by a state line from an incorporated city or town in an adjoining state and which has a population less than the population in the
adjoining city.”
16 The tax on beer in Texas is higher due to a $6.00 tax per barrel, compared to the $0.25 per barrel tax in Arkansas.
- 8 -
Business Income Taxes
FIGURE 5: Arkansas Corporate Income
Tax Rates
Business income taxes have an obvious effect on
business location decisions. Even on an interstate-average
basis, these direct taxes on a business’ profits or earnings
have been shown to have a statistically significant effect.17
7%
6%
5%
In the Tax Foundation scores for Business Income
Taxes, Texas moved from a ranking of 17th in FY2007 to
42nd in FY2008, dropping below Arkansas. In FY2011,
Texas dropped to 46th place compared to Arkansas’s
ranking of 40th. The dramatic decline in the Texas ranking
was associated with its adoption of a “margins tax,” which
the Tax Foundation characterizes as a “gross receipts tax.”
4%
3%
2%
Average
1%
0%
Gross receipts taxes are criticized because they tend
to result in “tax pyramiding” in which a final good
is taxed several times as it moves through various
stages of the production process. Gross receipts taxes
also tend to impose a larger burden on low-margin
businesses relative to higher-margin businesses. They
also apply regardless of profit or loss: Firms with
negative net revenue are still liable for tax payments
on gross receipts. The Texas margins tax has some
features that tend to mitigate these drawbacks, but
inefficiencies remain. One important feature is a
generous standard exemption that excludes many of
the businesses in Texarkana from paying the tax at all.
0
20
40
Marginal
60 80 100 120 140 160 180 200
Taxable Income ($Thousands)
Source: Arkansas Department of Finance and Administration
revenue that matters.) Figure 5 illustrates the relationship
between Arkansas’ average and marginal tax rates.
The treatment of business losses is an important feature
of the Arkansas Corporate Income Tax that distinguishes
it from business taxes in Texas. For small business in
particular, which tend to experience business losses
during their start-up years, the ability to offset tax liability
by carrying-over business losses from year to year is a
distinct advantage. As will be described below, the Texas
Margins Tax imposes a tax liability on all firms with
positive gross revenue, whether they are profitable or not.
Before describing the Texas margins tax in more detail
it will be useful to describe the Arkansas Corporate
Income Tax, which corresponds more closely with Federal
taxes and with the business income taxes of other states.
Texas Margins Tax
Arkansas Corporate Income Tax
Although Texas has no explicit corporate income
tax, it has long had a “franchise tax” that applied to the
capital or retained earnings of firms. Effective January
1, 2007, Texas implemented a new “margin tax,” which
is basically a general gross receipts tax. The rate is 1%,
calculated on a fairly broad tax base. Exemptions include
sole proprietors and general partnerships. Initially, the tax
allowed for a graduated “discount” for firms with gross
receipts of less than $1 million. Effective for the 2010
tax year, however, firms with gross receipts less than $1
million are exempt from the tax altogether.
Arkansas has a standard corporate income tax that
generally mirrors the structure of the Federal corporate
income tax. The tax base is net income – that is,
taxable income is calculated as gross receipts less
expenses and other deductions (See Figure A in the
Appendix). The exemptions and deductions include
cost of goods sold, interest, rent, taxes, employee
and officer compensation, depreciation, advertising,
etc. What is left as net revenue or “taxable
income” (on line 30 of the Arkansas Corporate Tax
Form) is intended to represent business profits.
The tax base for the margins tax equals total gross
receipts less:
The rate schedule for the Arkansas corporate income
tax is steeply progressive, rising from 1% for the first
$3,000 of net revenue up to 6.5% for net revenue above
$100,000. Because of the progressive rate structure,
the average tax rate is lower than the marginal rate. But
for many business decisions, it is the marginal rate that
matters. (For example, in the decision to expand the scale
of business operations, it is the tax rate on additional net
• Cost of goods sold (COGS), or
• Labor compensation costs (including benefits), or
• 30% of gross receipts.
This formula tends to favor some business over
others, depending on their relative shares of these
particular costs.
17 Bartik (1985) estimated that a 10% increase in a state’s corporate income tax rate resulted in a 2-3% decline in the number of new plants in that state.
- 9 -
Other important features include:
• The tax rate is 1.0% for most firms,
but it is 0.5% for businesses engaged
primarily in wholesale or retail trade.
FIGURE 6: Cost of Goods Sold and Total Labor
Compensation for Various Industry Groups
Agriculture
• Firms with gross receipts of less than
$10 million have the option of using the
E-Z method, in which gross receipts are
taxed, with no deductions, at .575%.
Mining
Utilities
• Firms with gross receipts of less than $1
million are exempt from the tax altogether.
Construction
Because the Texas Margins Tax allows deductions
for either compensation or COGS, it is more
properly classified as a “hybrid” gross receipts
tax. By exempting the cost-of-goods-sold (or labor
compensation costs, whichever is greater), the
Texas margins tax adds a level of complexity, but
tends, in part at least, to mitigate the problem of tax
pyramiding. The exemption for smaller firms also
limits tax pyramiding.
Gross receipts taxes have also been criticized for
penalizing low-margin firms. This is the motivation
behind having a lower tax rate for firms engaged
in wholesale and retail trade, which tend to have
exceptionally thin profit margins. But as will be
illustrated below, this is not an issue that is unique to
the wholesale and retail sectors. The Texas Margins
Tax implies differing effective tax rates for various
firms and industries, with the differences depending
on cost structures and profit margins.
Table A (in the Appendix) shows some
characteristics of cost in different industry groups,
using data derived from Federal tax returns. Figure
6 displays the two particular categories—COGS
(line 2 in Table A) and labor compensation (line
14 in Table A)—which are alternatively exempt
from the Texas margins tax. When it comes to
the choice of which deduction a business uses to
calculate its Texas taxes, a typical firm in the goods
producing sectors (e.g. construction, manufacturing,
etc.) will clearly choose COGS, which can amount
to three-quarters of gross revenue for some
businesses. On the other hand, labor compensation
costs tend to be somewhat higher in serviceproviding sectors. Typically, neither deductible
component of costs amounts to as much as COGS
in the goods-producing industries. In some
sectors, the average firm would find that the 30%
minimum deduction is larger than either of the two
deductible cost categories. This difference in cost
structures implies that firms in different industries
will be paying taxes on different tax bases.
Manufacturing
Wholesale Trade
Retail Trade
TransportationWarehousing
Information
FinanceInsurance
Real Estate-Rental
Professional-ScientificTechnical Services
AdministrativeWaste MgmtRemediation
Educational Services
Health CareSocial Assistance
Arts-EntertainmentRecreation
AccommodationFood Services
Other Services
COGS
Compensation
0% 10% 20% 30% 40% 50% 60% 70% 80%
Percent of Gross Revenue
Source: BizStats, based on 2006 data from the U.S. Internal
Revenue Service.
- 10 -
Comparing Arkansas and Texas Business Taxes
TABLE 7: The Texas Margins Tax Effective Tax Rates
Figure 7 displays another line from Table A: net
revenue or taxable income. It shows that profit
margins can also vary considerably from one sector
to another. If we consider net revenue to be a
measure of business profits, then it serves as an
appropriate common base for comparing effective
tax rates across industries—and across states.18 The
variation displayed in Figure 7 implies that these
effective rates will vary considerably across sectors.
(as percent of Net Revenue)
Agriculture
86,500
6.65%6.08%
Mining
198,300
2.90%2.77%
Utilities
80,000
7.19%5.73%
Construction
65,300
8.81%
4.20%
Manufacturing
86,800
6.62%3.80%
Wholesale Trade**
42,100
NA2.81%
Retail Trade**
43,300
NA3.22%
Transportation-Warehousing
68,100
8.44%
10.15%
Information
133,700
4.30%
5.24%
Finance-Insurance
193,400
2.97%
3.62%
Real Estate-Rental
160,600
3.58%
4.36%
Professional-Scientific-Technical Services
96,500
5.96%
6.37%
Administrative-Waste Management-Remediation
66,300
8.67%8.00%
118,800
4.84%
5.14%
Health Care-Social Assistance
95,000
6.05%5.76%
Arts-Entertainment-Recreation
134,600
4.27%
5.20%
Accommodation-Food Services
76,400
7.53%
8.87%
Other Services
72,900
7.89%
8.28%
These differences in effective tax rates are shown
in Table 7, and illustrated for some specific sectors in
Figure 8.19
FIGURE 7: Net Profits for Various
Industry Groups
Agriculture
Mining
Utilities
Construction
Manufacturing
Wholesale Trade
Retail Trade
Information
Finance-Insurance
Real Estate-Rental
Professional-ScientificTechnical Services
AdministrativeWaste Mgmt-Remediation
Health Care-Social Assistance
Arts-Entertainment-Recreation
*The E-Z alternative method of calculating the tax is
available for businesses with less than $10 million in
gross receipts. It is calculated as a straight 0.575%
of gross receipts with no exemptions. Figures in red
indicate effective tax rates that make it preferable to
use the margins tax formula, including exemptions.
Other Services
0%
Exemption
ThresholdEffective Tax Rates
($ Net Revenue) E-Z Method* Margins Tax
5%
10% 15% 20%
Percent of Gross Revenue
**Firms engaged primarily in wholesale and retail trade are
subject to a lower tax rate of 0.5%.
Source: BizStats, based on 2006 data from the U.S. Internal
Revenue Service.
18 Although not identical, the net profit margins displayed in Table A1 and illustrated in Figure 7 (which are from Federal tax calculations) generally
reflect the same tax base used by the Arkansas tax code.
19 Throughout this analysis, we maintain the (unrealistic) assumption that cost structure is invariant to scale. That is, firms of different sizes will
have the same percentages for costs and profit margins. Care should be taken when extrapolating these illustrations to particular firms or sectors.
Rather, the estimates should be considered illustrative of businesses having these general configurations of cost structure.
- 11 -
FIGURE 8: Effective Tax Rates for Firms in Selected Industries
12%
6%
10%
Tax as Percent of Net Revenue
Manufacturing
7%
5%
4%
3%
Texas
Arkansas (Average)
Arkansas (Marginal)
2%
1%
0%
0
1
2
3 4 5 6 7 8
Total Revenue (Millions)
9
10 11
8%
6%
4%
2%
0%
12
Texas
Arkansas (Average)
Arkansas (Marginal)
0
1
7%
7%
6%
6%
5%
4%
3%
Texas
Arkansas (Average)
Arkansas (Marginal)
2%
1%
0%
0
1
2
3 4 5 6 7 8
9
10 11
1%
0%
12
5%
4%
3%
Texas
Arkansas (Average)
Arkansas (Marginal)
2
0
1
2
3 4 5 6 7 8
9
10 11
12
Professional-Scientific-Technical Services
6%
1
Texas
Arkansas (Average)
Arkansas (Marginal)
2%
6%
0
12
3%
7%
0%
10 11
4%
7%
1%
9
5%
Retail Trade*
2%
3 4 5 6 7 8
Information Services
2
3 4 5 6 7 8
9
10 11
5%
4%
3%
1%
0%
12
Texas
Arkansas (Average)
Arkansas (Marginal)
2%
0
1
2
3 4 5 6 7 8
9
10 11
12
*Firms primarily engaged in wholesale and retail trade are subject to a reduced 0.5% tax rate under the Texas Margins Tax.
- 12 -
Consider Manufacturing, which has a very high
COGS component (67%). With this relatively
large deduction, there is no advantage to using
the E-Z method of calculating the tax, so there
is effectively a single tax rate that applies to all
sizes of firms that are liable for paying the tax.
The one-percent tax rate, applied to 33% of gross
revenue (after deducting COGS) implies a 0.33%
effective tax rate on gross receipts. A typical
manufacturing firm has a profit margin of about
8.7% of gross revenue. When assessed relative to
this base, the effective tax rate as a percent of net
revenue is about 3.8%. This figure can be directly
compared to the tax rates under the Arkansas
Corporate Income Tax. The Texas tax kicks in for
firms with over $1 million in gross receipts, or
about $87,000 in net revenue. At this level of net
revenue, the relevant Arkansas marginal tax rate is
6.0%. (The Arkansas marginal rate rises to 6.5%
at a threshold of $100,000 in net revenue.) For a
typical firm in the manufacturing sector, therefore,
the Texas Margins Tax results in a lower tax
burden than the Arkansas Corporate Income Tax.
Corporate Income Tax. Professional, Scientific,
and Technical Services is an example of one
sector where effective tax rates in the two states
are very close. Labor compensation costs tend to
be relatively high in this sector, but not enough
to make the E-Z option unattractive. However,
firms in this sector also tend to have fairly low
profit margins (lower than information Services,
for example), so that the effective tax rate on net
revenue turns out to be higher. For businesses
with gross revenue in the $1 million to $10 million
range, the E-Z method implies an effective tax
rate of nearly 6%. For larger firms, the Margins
Tax calculation implies an effective rate of 6.4%.
Over the range that these rates are applicable,
the marginal tax rate in Arkansas is 6.5%.
Two examples of sectors that might face lower
effective tax rates in Arkansas than in Texas are
shown in Figure 8—Accommodation and Food
Service; and Transportation and Warehousing.
Both of these sectors have fairly low COGS,
so the Texas tax is imposed on a fairly broad
base. They also have very low profit margins,
implying that effective tax rates—evaluated
relative to net revenue—are particularly high.
As a result, over the range of gross revenue for
which firms are liable for the Texas Margins
Tax, effective tax rates exceed the 6.5% marginal
tax rate in Arkansas. This is true for smaller
firms that are eligible to use the E-Z method and
for larger firms as well. Given the prominent
role of Transportation and Warehousing in the
Texarkana economy – on both sides of the border
– this difference could conceivably be important
for evolving business patterns over time.
The Information Services sector provides an
example of how the E-Z method provides a lowertax option for many firms. With low COGS and
labor compensation margins, a typical firm in
this sector will opt to take the 30% minimum
deduction under the Margins Tax. This implies a
0.7% effective tax rate on gross receipts, above
the 0.575% rate that applies if a firm foregoes
the deduction altogether. As a percentage of
net revenue, the E-Z method effective tax rate
is 4.3%. Firms with gross receipts greater
than $10 million do not have the E-Z option.
Their effective tax rate (as a percentage of net
revenue) is 5.25%. These rates are higher than
those faced by manufacturing, but lower than
the corresponding tax rates in Arkansas.
In principle, then, some types of businesses
might find it advantageous – in terms of effective
tax rates – to locate in Arkansas rather than in
Texas. In practice, however, few firms are likely
to fall into this category. But the exemption
for firms with gross revenue under $1 million
means that most firms in Texarkana face no
tax obligation under the Texas Margins Tax.
The retail sector has a relatively high COGS, so
its effective tax base under the Texas Margins Tax
is small. However, the retail sector is characterized
by very thin profit margins – 4.33% in the data
from 2006 tax returns. As a result, the effective tax
rate (on net revenue) that would be faced by retail
firms under the standard Margins Tax is 6.44%.
Recognizing the impact of the tax on retail and
wholesale firms, with their small profit margins,
the Texas tax code applies a special 0.5% tax rate to
firms in retail and wholesale trade. With this break,
the effective tax rate for retail firms is only 3.22%.
Figure 9 shows a distribution of firm sizes
on both sides of the border. On the Arkansas
side of the border, nearly 66% of businesses
have less than $1 million in sales. In Texas,
the distribution of firms is more skewed toward
the upper end of the $0 to $1 million range,
but the share of businesses within this range is
nearly 69%. By this account about two-thirds
of the businesses on each side of the border are
presently exempt from the Texas Margins Tax.
Not all firms face lower effective tax rates under
the Texas Margins Tax than under the Arkansas
- 13 -
In the aftermath of the recession of 2008-09, Texas
faces the prospect of significant budget shortfalls, and
the Margins Tax has been cited as a part of the problem.
A recent task force report showed that the tax collected
$3.9 billion in the last fiscal year – far below the $6.4
billion projected.20 And in fact, the Margins Tax has
raised far less revenue than expected since its inception.
FIGURE 9: Distribution of Firm Sizes
(by Gross Receipts)
40.6%
<$500K
37.7%
25.2%
$500K-$1M
31.2%
18.3%
$1-2.5M
16.9%
7.4%
$2.5-5M
$5-10M
$10-20M
$20-50M
$50-100M
>$100M
0%
The outlook for the Margins Tax–as it is presently
constituted –is therefore somewhat tenuous. If the
pro-rated tax payments for smaller firms were to be
reinstated, the Arkansas Corporate Tax might appear
more favorable for more of the firms that pay higher
effective tax rates under the Margins Tax scheme. If
the Margins Tax were scrapped altogether in favor of a
more conventional business income tax or a modified
version of the former Franchise Tax, it is difficult to
anticipate precisely how the balance of cross-border
tax incentives would be affected.
7.3%
4.0%
Marginal Tax Rates and Incentive Effects
3.1%
For most decisions, it is the marginal tax rate that
matters to a business. Because the Texas Margins Tax
displays a flat-rate structure, rather than a progressive
structure, the marginal and average tax rates are
generally the same.21 This is not true near the cut-off
levels of $1 million and $10 million in gross sales.
Over narrow ranges around these critical points the
effective marginal tax rate can be very high.
2.3%
1.6%
1.8%
1.5%
0.2%
0.4%
0.2%
This is particularly important in the case of the $1
million threshold. Firms with gross sales below this
point owe no tax, while those even slightly above it owe
tax on their entire taxable sales base. The impact of
this borderline effect for one industry, TransportationWarehousing, is illustrated in Figure 10.
Texarkana, AR (1147 firms)
Texarkana, TX (2910 firms)
0.3%
FIGURE 10: After-Tax Revenue,
5% 10% 15% 20% 25% 30% 35% 40% 45%
Source: ReferenceUSA
After Tax Net Revenue ($Thousands)
Note: Percentages are calculated using only those
businesses that report gross receipts in the ReferenceUSA
database. The database includes 374 firms in Arkansas
(24.6% of the total reported) and 602 firms in Texas (17.1% of
the total reported) that do not disclose gross receipts. Many
of these are non-profits or government entities.
The exemption for firms with revenue less than
$1 million is a recent innovation to the Margins Tax.
Originally, smaller firms were required to calculate
taxes owed and pay a fraction of the total amount,
based on a scale ranging from zero to 100% at the $1
million threshold. In 2010, the fractional scale was
eliminated, exempting all smaller firms.
70
69
68
67
66
65
64
63
62
61
60
0.90
0.95
1.00
Gross Revenue ($Millions)
1.05
1.10
20 Ward (2010).
21 Average and marginal tax rates differ under a progressive structure in which one rate applies to the first portion of revenue, a higher rate applies to
the next portion, etc. In the Texas Margins Tax, a single rate applies to the entire taxable portion.
- 14 -
Below the $1 million level, a business with a
fixed profit margin experiences increases in net
revenue in direct proportion to increases in gross
receipts. Upon hitting the $1 million point, a
growing firm would find it had lower after tax
net revenue than it did before it surpassed the tax
threshold. Indeed it would be more profitable for
firms in the transportation/warehousing sector to
remain below $1 million than to grow to a range of
$1 to $1.09 million. Beyond that point, businesses
would make a higher level of profits than smaller
firms, but at a lower after-tax rate of profit. The
structure of the Texas Margins Tax therefore
provides an incentive for firms to remain small
enough to benefit from the $1 million exemption.
Each factor is calculated as the Arkansas share
of the total. So, for instance, if a business has 30%
of its nationwide property holdings in Arkansas,
the property factor is 0.3. If 25% of its payroll
employment is in Arkansas, the payroll factor is .25.
From an economic standpoint, these two nonrevenue
factors can be considered as income-based taxes on
property and payrolls.23
Consider a firm that has 50% of its sales in Arkansas
and 50% in Texas. If its physical place of business
is located in Texas and its payroll emanates from that
office, then it is liable for the Texas Margins Tax on
all of its sales and liable to Arkansas for 25% of its
sales (the firm’s property factor and payroll factor in
Arkansas are zero, so 1/2 x 0.5 = 0.25). This amounts
to a double-taxation, since Texas law does not allow
explicit deductions for taxes paid to other states.
Apportionment Issues
To this point, the comparison of business taxes in
Arkansas and Texas has maintained the unrealistic
assumption that a firm does all of its business on the
side of the border on which it is located. In practice,
many firms have activities that are taxable on both
sides of the state line. The methods that the two states
use to allocate cross-border income are relevant to the
business location decision.
Now consider the same firm with its sole physical
location in Arkansas. The one-half of its sales that
are made in Texas are subject to the Texas Margins
Tax, while 75% of its business is taxable in Arkansas
(1/2 x 0.5 + ¼ x 1.0 + ¼ x 1.0=0.75). The ability of
firms to deduct taxes paid to Texas from Arkansas
taxable revenue helps to mitigate the double-taxation
in this case. However, for firms that face higher
effective tax rates in Arkansas than in Texas this
deductibility only partly offsets the additional tax
burden from double-taxation.
The Texas Margins Tax apportionment is simple:
the tax is payable on the share of gross receipts
received from business in Texas. A firm located
exclusively on the Texas side of the border is liable
for tax on all of its gross receipts, while a firm on
the Arkansas side pays the tax only on that share
of revenue received from sales in Texas. All else
being equal, this tends to favor doing business from
outside the state to avoid the Texas Margins Tax on
sales outside of Texas. 22 As we have already seen,
however, all else is not equal.
In general, the differing apportionment formulas
tend to reinforce the effects of differences in
effective tax rates in the two states. Because most
businesses face lower rates under the Texas Margins
Tax (particularly the small businesses that tend to
predominate in the Texarkana economy), this tends to
reinforce the incentive to locate a firm on the Texas
side of the border.
The Arkansas Corporate Income Tax uses a common
three-factor apportionment formula, where the three
factors are sales revenue, property, and payroll. In
the Arkansas formula, sales revenue is given double
weight, so the formula is:
½ x Sales Factor
¼ x Property Factor
+
Tax-Abatement Incentive Programs
Given that tax rates provide disincentives to business
development and expansion, many state governments
offer incentive programs to rebate the taxes associated
with establishing or expanding businesses in the state,
particularly in underdeveloped or impoverished areas.
Both Texas and Arkansas have such programs, although
they differ in their scope and emphasis.
¼ x Payroll Factor
In Arkansas, the “Advantage Arkansas” program
is established under the Arkansas Enterprise Zone
Act (1993). Unlike many enterprise zone programs,
Arkansas Apportionment
22 The economic distortion from this effect is minimized by the fact that apportionment is based on the same criterion (gross sales) as the tax base.
23 McClure (1980). The income-based tax burden on property has been found to be a particularly relevant for capital expenditure decisions by
manufacturing firms (Gupta and Hoffman, 2003).
- 15 -
Advantage Arkansas can be used in any
area of the state. In effect, the entire
state is treated as an enterprise zone.
For qualified businesses that promise
to hire a minimum number of new
full-time permanent employees, earned
income tax credits are available per
employee hired and the state provides
a refund of sales and use taxes paid for
building materials and taxable purchases
of machinery and equipment. The
minimum number of new employees
depends on the type of business.
FIGURE 11: Enterprise Zones in Bowie County, Texas
The base-level income tax credit is equal
to the average hourly wage paid to each net
new full-time employee times the number
of new employees times a multiplier of
100 (with a $3,000 cap per employee).
The program favors counties in economic
hardship, providing for a multiplier of 400
(with a cap of $6,000) for counties that are
classified as having “high unemployment”
(relative to the statewide average).
“distressed county” – a poverty rate over 15.4%, 25%
of the population without a high school diploma, and
long-term unemployment above 4.9% – automatically
qualify as an enterprise zone. Smaller areas also
qualify if they represent a Census block group in
which at least 20% of the residents have an income at
or below the poverty line.
The Advantage Arkansas program applies to
a limited number of business types. It includes
manufacturers with Standard Industrial Classification
(SIC) codes 20 through 39, for which the minimum
number of new employees is one or more. One or more
employees must also be hired for firms engaged in
physical or biological research (SIC 8371). Businesses
that provide computer programming services or
other computer processing services are eligible if
they hire five or more new employees. Twenty-five
new employees are required to be eligible in the
other specific industries that are covered: Office
sector businesses; national, corporate or regional
headquarters; distribution centers; trucking/distribution
terminals (SIC 4231); coal mining operations, and
motion picture production companies (SIC 7812).
Each of these types of qualifying businesses is subject
to restrictions on retail sales to the general public.
Figure 11 shows the currently designated enterprise
zones in Bowie County. There are three covered areas:
one section near the county seat of New Boston, a
region in the northwest portion of the county adjacent
to Red River County (a distressed county), and one
zone that covers much of the area within the city limits
of Texarkana, Texas – particularly the southern and
western portions of the city.
Texas Enterprise Zone projects need not be located
within designated zones. If they are located outside
a zone, they are required to commit that at least 35%
of their new employees will be residents of a zone or
that they meet the qualifications to be “economically
disadvantaged.”24 Businesses located within a zone
face only a 25% new employee requirement.
The emphasis on manufacturing, trucking, and
distribution may or may not have contributed to
the development of concentrations in those sectors
on the Arkansas side of the state line, but it surely
provides incentives to retain and strengthen those
relative concentrations.
The types of businesses eligible for enterprise zone
credits and refunds are not restricted in Texas, but
there are limits on sales and use tax refunds, with the
limits related to the level of capital investment. For
capital investments up to $150 million, the maximum
refund per job is $2,000, with the maximum number
The Texas Enterprise Zone program is oriented
more toward development in specific economically
distressed areas. Counties that satisfy the criteria for a
24 To qualify as economically disadvantaged an individual can be disabled, low income, an orphan, an ex-convict or unemployed (within specific
definitional categories).
- 16 -
of eligible jobs capped on a graduated scale from 10
to 500 jobs (over four ranges of capital investment
levels). Larger investments—known as Double
Jumbo and Triple Jumbo Projects—have a maximum
refund for up to 500 jobs at $5,000 to $7,500 per
job. Projects are also eligible for Franchise Tax
(Margin Tax) credits. Local governments that
nominate projects for designation may also exempt
local taxes and waive regulations on construction.
The sales tax differential can also effect business
decisions outside the retail sector, especially since
many business-to-business transactions are subject to
sales taxes.
Historically, absence of a corporate income tax has
given Texarkana, Texas a significant advantage in
attracting business investment. This is undoubtedly an
important driving force in the expansion of business in
Texarkana, Texas relative to Texarkana, Arkansas.
The Texas Enterprise Zone program is less
targeted toward specific types of business than the
Advantage Arkansas program, but more targeted
toward specific disadvantaged areas. The scale of
maximum refunds in Texas (and the irrelevance
of the Margins Tax for smaller firms) favors
projects that commit large capital investments,
rather than the smaller incremental projects that
are fully eligible under the Arkansas program.
The Texas Margins Tax, introduced in 2007, introduces
a new set of tax considerations into the mix:
• It is a modified gross receipts tax, so it has
features in common with a business income tax
and with a sales tax. As a business income tax,
a general gross receipts tax is inefficient and
inequitable. It often results in “tax pyramiding,”
and imposes differing effective marginal
tax rates on the business profits of firms in
different sectors. It also imposes a tax that is
independent of profit or loss, which can be a
particularly important consideration for young,
small firms that often experience periods of
business losses in the early stages of growth.
Summary and Conclusions
Both economic theory and empirical evidence
suggest that differences in tax structures among
subdivisions of a region provide one set of
factors that can have significant impacts on
household and business location decisions.
Texarkana provides a unique case study for
observing the effects of such differences.
• Features of the Texas Margins Tax mitigate some
of these effects. The exemption of COGS or
compensation costs allows firms with particularly
high costs in these areas to lower their exposure
to taxation. The special exemption for firms in
retail and wholesale trade helps to adjust effective
tax rates for firms with very thin profit margins.
Most of all, the exemption of businesses with
gross revenue of less than $1 million serves to
partly mitigate each of the general problems
associated with a pure gross receipts tax.
The Arkansas income tax exemption for Texarkana
residents helps to level the playing field for residents
on both sides of the border. Nevertheless, specific
features of the exemption generate incentives for
residential and business location decisions that are
consistent with the patterns we observe: Specifically,
the fact that the tax exemption only applies to
residents within the city limits acts as a disincentive
for any residential and business expansion beyond
Texarkana city into Miller County at large.
• The exemption for firms with gross revenue
less than $1 million also means that about
two-thirds of the businesses in the Texarkana
metro area are exempt from the tax altogether.
For most firms, therefore, Texas still has no
meaningful business income tax, while the
Corporate Income Tax in Arkansas applies
for all firms with positive net revenue.
Property taxes also affect both business and
residential location decisions. Among tax-related
factors, this constitutes one of the most important
differences for households. For firms, it is only one
of many tax effects that can affect business plans. The
lower property taxes in Arkansas have contributed to a
relatively robust residential expansion in recent years.
Business expansion has not followed suit, however,
suggesting that other factors are more important.
Overall, the introduction of the Texas Margins Tax
does little to weaken the advantage that Texas has
over Arkansas in terms of low business income taxes.
Assuming that the Margins Tax retains its current
structure, it is unlikely to have a substantive impact on
the status quo. However, it is likely that changes in
the Margins Tax will be contemplated in the future. It
has brought in less revenue than anticipated, and Texas
is facing substantial budget shortfalls. Prospective
Sales taxes are higher on the Arkansas side of
the state line than on the Texas side, providing an
incentive for firms in the retail trade sector to locate
in Texas. Employment location quotients also show
that the retail trade sector is generally larger on the
Texas side than on the Arkansas side of the border.
- 17 -
changes to the tax could make the Arkansas Corporate
Income Tax relatively more favorable for some
businesses.
Enterprise zone programs in the two states have
differing emphases. The Texas program tends to favor
large capital projects in relatively impoverished areas.
The Arkansas program favors expansion of its existing
concentrations in manufacturing and transportation.
Taking account of all of these factors, tax
considerations are unlikely to alter recent trends in the
pattern of development across the Texarkana metro
area. This pattern is characterized by more rapid
growth of business and commerce on the Texas side of
the state line, with growth on the Arkansas side of the
border more heavily weighted toward manufacturing
and favoring residential expansion.
- 18 -
References
Bartik, Timothy J., “Business Location Decisions in the United States: Estimates of the Effects of Unionization,
Taxes, and Other Characteristics of States” Journal of Business & Economic Statistics 3:1 (1985), 14-22.
Bartik, Timothy J., “Small Business Start-Ups in the United States: Estimates of the Effects of Characteristics of
States,” Southern Economic Journal 55:4 (1989), 1004-1018.
Bartik, Timothy J., Who Benefits From State and Local Economic Development Policies? Kalamazoo, MI: W.E.
Upjohn Institute for Employment Research, 1991.
Bell, Robert, “Retailers Praise Change in Law On Interest Rates,” Arkansas Business 28:2 (January 10-16, 2011), p. 1.
Greene, Stephen, “Doing Business in Texarkana Sometimes Means Going Over the Line,” Federal Reserve Bank of St.
Louis, Regional Economist, April 2002, 14-15.
Gupta, Sanjay and Mary Ann Hofmann, “The Effect of State Income Tax Apportionment and Tax Incentives on New
Capital Expenditures,” The Journal of the American Tax Association, Vol. 25 (supplement), 2003, 1-25.
Harden, J. William, and William H. Hoyt, “Do States Choose Their Mix of Taxes to Minimize Employment Losses?”
National Tax Journal 56:1 (March 2003), 7-26.
Helms, L. Jay, “The Effect of State and Local Taxes on Economic Growth: A Time Series-Cross Section Approach,”
Review of Economics and Statistics 67:4 (1985), 574-582.
Kaza, Greg, “A Texarkana Tax Tale,” National Review Online, May 2, 2007.
http://article.nationalreview.com/313800/a-texarkana-tax-tale/greg-kaza
Ladd, Helen F., “Effects of taxes on economic activity,” in Helen F. Ladd, ed., Local Government Tax and Land Use
Policies in the United States: Understanding the Links, Lincoln Institute of Land Policy: 1998, 82-115.
Mark, Stephen T., Therese J. McGuire and Leslie E. Papke, “The Influence of Taxes on Employment and Population
Growth: Evidence from the Washington, D.C. Metropolitan Area,” National Tax Journal 53:1 (March 2000),
105-123.
McLure, Charles E., Jr. “The state corporate income tax: Lambs in wolves’ clothing.” In H. Aaron, and M. Boskin
(ed.) The Economics of Taxation, Washington, D.C.: Brookings Institution, 1980.
Prante, Gerald, “Where Do State and Local Governments Get Their Tax Revenue, The Tax Foundation, Fiscal Fact,
No. 194, October 9, 2009. http://www.taxfoundation.org/files/ff194.pdf
Padgitt, Kail M., “2011 State Business Tax Climate Index (Eighth Edition),” Tax Foundation, Background Paper, No.
60, October 2010. http://www.taxfoundation.org/files/bp60.pdf
Papke, James A., and Leslie E. Papke, “Measuring Differential State-Local Tax Liabilities and Their Implications for
Business Investment Location,” National Tax Journal 39:3 (1986), 357-66.
Ward, Mike, “Report: State Business Tax Falling Short of Expectations,” American-Statesman, November 3, 2010.
Wasylenko, Michael, “The Location of Firms: The Role of Taxes and Fiscal Incentives,” in Roy Bahl (ed.), Urban
Government Finance: Emerging Trends, Beverly Hills, Sage Publications, 1981.
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Development (March/April1997): 37-52. http://www.bos.frb.org/economic/neer/neer1997/neer297c.pdf
Wasylenko, Michael and Therese McGuire. 1985. “Jobs and Taxes: The Effect of Taxes on States’ Employment
Growth Rates.” National Tax Journal 38:4 (1985), 497–514.
- 19 -
Table A: Annual Average Sales, Income & Expenses of Corporations
Sales
Agriculture-
Forestry-
Hunting-Fishing
Mining
Utilities
ConstructionManufacturing
100.00%
100.00%
Cost of Sales
47.44%
45.15%
54.15%
72.55%
67.00%
Gross Profit
52.56%
54.85%
45.85%
27.45%
33.00%
Officers Compensation
2.18%
1.12%
0.33%
2.73%
0.69%
Salary-Wages
7.07%
4.77%
3.80%
4.69%
5.49%
Rent
4.07%
1.62%
0.73%
1.43%
0.76%
Taxes
1.86%
3.11%
3.66%
1.56%
1.59%
Interest paid
1.81%
2.66%
5.17%
0.69%
3.05%
Amortization & Depreciation
4.06%
6.75%
7.11%
1.17%
2.47%
Advertising
0.30%
0.06%
0.09%
0.32%
1.13%
Benefits-Pension
1.06%
1.47%
2.12%
1.21%
1.91%
Other SG&A Exp.
21.50%
13.45%
14.83%
7.12%
7.23%
8.65%
19.83%
8.00%
6.53%
8.68%
Net Profit
100.00%
100.00%
100.00%
Memo: Labor’s Share of COGS11.24%
9.62%
1.18%
14.37%
9.03%
Labor in COGS
4.34%
0.64%
10.43%
6.05%
5.33%
Total Labor Compensation
15.64%
11.70%
6.89%
19.06%
14.14%
(4+5+11+14)
Sales
Wholesale
Trade
Retail
Trade
Transportation- Finance-
WarehousingInformation Insurance
100.00%
100.00%
100.00%
100.00%
100.00%
Cost of Sales
76.33%
72.14%
30.89%
17.80%
27.49%
Gross Profit
23.67%
27.86%
69.11%
82.20%
72.51%
0.97%
0.84%
1.31%
1.22%
1.00%
Salary-Wages
6.77%
8.82%
16.49%
14.14%
8.06%
Rent
1.50%
2.23%
4.89%
2.26%
0.70%
Taxes
1.20%
1.47%
3.09%
2.42%
1.28%
Interest paid
0.85%
0.87%
1.83%
6.43%
20.37%
1.11%
1.21%
4.43%
7.59%
1.58%
Advertising
1.04%
1.38%
0.43%
2.43%
0.56%
Benefits-Pension
0.84%
0.94%
3.86%
2.67%
1.11%
Other SG&A Exp.
5.17%
5.77%
25.96%
29.68%
18.49%
Net Profit
4.21%
4.33%
6.81%
13.37%
19.34%
1.09% 13.25%
7.11%
0.14%
Labor in COGS
0.79%
1.27%
0.04%
1.01%
4.09%
9.59%
11.39%
25.75%
19.30%
10.21%
(4+5+11+14)
Source: BizStats.com and author’s calculations.
- 20 -
(continued)
Table A: Annual Average Sales, Income & Expenses of Corporations (continued)
Sales
Real Estate
ProfessionalAdministrative-
Scientific-
Support-
Health Care-
Technical
Waste Mgmt- Educational
Social
Services
Remediation
Services
Assistance
100.00% 100.00%100.00%100.00%100.00%
Cost of Sales
16.78%
Gross Profit
83.22% 71.20%55.72%87.08%90.67%
Salary-Wages
4.63%
28.80%
7.44%
44.28%
2.65%
12.92%
4.60%
9.33%
11.66%
17.71% 21.45%19.50%28.26%27.25%
Rent
5.25% 3.21%1.87%6.56%4.16%
Taxes
3.21% 3.02%4.42%3.75%3.49%
Interest paid
4.28% 1.30%1.30%1.73%1.49%
8.38%
Advertising
1.48% 1.00%0.79%5.18%0.80%
Benefits-Pension
1.75% 3.08%2.44%2.54%4.17%
1.61%
2.21%
2.25%
1.91%
Other SG&A Exp.
20.47%
19.44%
13.91%
20.34%
26.23%
Net Profit
16.06%
9.65%
6.63%
11.88%
9.50%
Memo: Labor’s Share of COGS
8.07% 22.80%50.54%27.52%23.63%
Labor in COGS
1.35%
6.57%
22.38%
3.56%
2.20%
25.44%
38.54%
46.97%
38.96%
45.28%
(4+5+11+14)
Sales
Arts-
Entertainment-Accommodation-Other
Recreation Food Services
Services
100.00%
100.00%
100.00%
Cost of Sales
16.27%
32.24%
39.62%
Gross Profit
83.73%
67.76%
60.38%
7.81%
1.89%
4.79%
17.95%
19.83%
14.77%
Rent
Salary-Wages
4.78%
5.87%
5.64%
Taxes
5.50%
4.39%
3.19%
Interest paid
2.38%
3.05%
1.36%
3.94%
3.03%
2.37%
Advertising
1.96%
2.45%
1.31%
Benefits-Pension
2.25%
1.64%
1.70%
Other SG&A Exp.
23.69%
17.98%
17.96%
Net Profit
13.46%
7.64%
7.29%
Labor in COGS
1.78%
16.14%
5.20%
20.28%
8.03%
29.79%
28.56%
29.29%
(4+5+11+14)
Source: BizStats.com and author’s calculations.
- 21 -
(continued)
Figure A: Arkansas Corporate Income Tax Form
Source: Arkansas Department of Finance and Administration
- 22 -
2801 South University Avenue, Little Rock, AR 72204-1099
Phone: (501) 569-8519 • Fax (501) 569-8538 • www.iea.ualr.edu

Taxes and the economy of Texarkana - UALR

Transcription

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