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Response of Economic Activity to Changes (or Variations) in the TPP Tax
3. The Response of Economic Activity to Changes (or Variations) in the TPP Tax
The limited number of studies on TPP taxes 9 have offered mixed conclusions about the benefit or harm of reform on economic outcomes. (Lynch 2004; Fisher 1997; DeBoer 1999; Mughan & Propheter 2017; Wasylenko 1997; Niskanen & Moore 1996). The results of a recent study on the effects of the elimination of TPP taxes in Ohio demonstrate that manufacturing jobs declined following the repeal of these taxes (Mughan & Propheter 2017). Some studies demonstrate that there are more important factors businesses and investors take into consideration when deciding to base their operations in a particular location. Factors such as the quality of the available labor force (e.g., education attainment and necessary skills to fill firms’ needs), utility and occupancy costs, infrastructure (e.g., highways and transportation), proximity to consumers and the quality of public services, appear to be more significant in a firm’s location decision than local and state tax structure (Ady 1997; Fisher 1997; Lynch 2004). The biggest criticism against TPP tax cuts is that states are faced with the dilemma of decreasing revenue to fund public services or shifting the burden to the remaining taxpayers (Collins 2015).
On the other hand, there are several studies that suggest that state taxes, including TPP, can have an important impact on employment growth and firms’ investment decisions (Harden & Hoyt 2003; Mark, McGuire, & Papke 2000; Walczak, Drenkard, & Henchman 2015; Tax Foundation 2015; Tuerck, Bachman, & Conte 2016; McBride 2012). Recent studies demonstrate that companies are becoming more responsive to changes in state tax policy as the shifting global economy becomes increasingly more reliant on mobile capital and intangible personal property as opposed to immobile capital and tangible personal property (e.g., service industry and high-technology companies vs. manufacturing-based economy) (Brunori 2016; Tuerck, Bachman, & Conte 2016).
There are, nonetheless, equally important or more nuanced questions to be asked when considering the effectiveness of changes in state tax policy. For instance, studies that seek to evaluate the outcome of TPP tax reform (i.e., phase out and elimination) need to assess not only the number of jobs created – aggregate employment – but also the type and quality of jobs (i.e., higher paying employment) (Harden & Hoyt 2003). Other important questions to take into consideration are:
- Following the elimination of TPP taxes, did manufacturing companies opt to modernize their machinery and equipment (i.e., use more productive capital goods)? That is to say, do such changes in tax policy actually incentivize modernization? This question is of special concern to West Virginia because manufacturing firms will need to invest in advanced technologies in order to meet the demands of the Fourth Industrial Revolution 10 (JLL Staff Reporter 2018; Meyer 2018);
- For states that decided to repeal TPP taxes and, consequently, experienced a decrease in the number of manufacturing jobs, can the shift in the number of jobs be explained by the use of more modern means of production – which might require fewer employees but a more specialized workforce? If yes, is there a relationship between making use of less/more modern means of production and job generation and retention?
- Is there a relationship between the presence/absence of TPP taxes and companies’ levels of productivity and output? In other words, following the reform or elimination of TPP taxes, were most firms able to improve their productivity, increase their output and/or the value of their manufactured/final goods (Mughan & Propheter 2017; Tuerck, Bachman, & Conte 2016)?
- Do companies based in states that impose TPP tax on machinery and equipment opt to use less productive/modern capital goods to keep the cost of production to a minimum?
- Does the presence/absence of TPP taxes in a given state influence the location of economic activity in the border counties of neighboring states (Holmes 1998; Fox 1986; Harden & Hoyt 2003; Errecart, Gerrish, & Drenkard 2012)?
- How many firms were created as a result of the elimination of such taxes?
- Lastly, what was the impact of the elimination of TPP taxes on local government revenues, the state general fund and the school aid formula? If an alternative tax was implemented, how did revenue collections compare to those from TPP taxes? Particularly, how successful was the new tax in compensating losses incurred by local governments and the school aid formula?
Tax policy should be devised with the goal of maximizing employment while taking into account the employment-revenue trade-off of tax reform and those affected by such changes (Harden & Hoyt 2003). The following sections address the revenue situation in West Virginia, strategies adopted by states that have managed to eliminate TPP taxes – including examples from Ohio and Michigan – and concerns, options and potential solutions.
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