Making State and Local Taxes “Friendly” to Small Businesses

By :: June 19th, 2014

Small business owners are more concerned with the complexity of state and local tax laws than with the amount of tax they pay, according to a recent survey conducted by in partnership with the Ewing Marion Kaufman Foundation.

Aside from economic conditions, small business owners’ perception of the ease of compliance with licensing, regulatory, and tax regulations is the most important predictor of whether or not they considered a state or city friendly to their firms.

The survey asked over 12,000 small business owners to rate the degree to which their state or city was small-business friendly. Then it asked a series of questions about the specific business environment in their state or city. By comparing the answers, it found:

  • The respondents’ view of the performance of their state economy relative to the national economy was the most important factor in their rating of small-business friendliness.
  •  Those who were aware of training or networking programs offered by their state or local government were significantly more likely to say that their state or city was small-business friendly than those who were not aware such programs existed.
  •  The ease of complying with professional licensing, certification, or permitting requirements was the most important regulatory factor, followed closely by the ease of understanding and filing business taxes.
  • While the ability to easily file taxes was an important consideration, the amount of taxes paid was not for the majority of small business owners. Among those surveyed, 64 percent said they paid the “right share” of taxes, while 35 percent said their taxes were “unfairly high.” Even among small business owners who identified themselves as “strong conservative”, 51 percent said they paid the “right share” of taxes, as did 60 percent of those who identified as “lean conservative”.

Thus, while most small business owners accept the amount of tax they pay, the paperwork accompanying those taxes and other regulatory requirements can cloud their view of the local business environment. The results are consistent with other research, discussed here and here.

Those papers find that policies that assist businesses with licensing, permitting, and tax filing; provide technical assistance to help firms grow; and provide well-targeted job training and education are much more effective than tax incentives in promoting business development and economic growth.


  1. Ralph H  ::  5:07 pm on June 19th, 2014:

    Looking at the report there seems to be a very strong correlation between high tax “blue” states and being business unfriendly. Perhaps having all the extra state and local employees leads to more ways to interfere? in my world (PA, NJ NY,DE) the grades were pretty bad. I suspect most small business are organized as sole proprietors, partnerships or LLCs so the taxes paid are the same as individuals and this contributes to the feeling their tax level is just right. I bet this is not true of small “C” corporations. Also, most of us use the accelerated depreciation to write off our SUVs, so we feel a little benefit for the risk and hassles.

  2. Jon Lieber  ::  5:31 pm on June 19th, 2014:

    Ralph – your intuition is exactly consistent with what we found in our survey results. Larger businesses and businesses that were more formally organized (i.e. C-Corps) were more likely to say they paid an unfairly high level of taxation – 46 percent of S-Corps and 43 percent of C-Corps said they paid “an unfairly high level of taxes” while only 32 percent of sole proprietors said this.

    You can see these results presented on the table on page 13 here:

  3. Michael Bindner  ::  5:31 pm on June 19th, 2014:

    The tricky part of studies like this is how to define what is a small business. The large majority of such busisses are one person operations – Avon ladies, retirees consulting with their old firm or workers who are filing as a sole proprietor because the overwhelming trend in an economy where decisions are made based on health care reform impacts – although counting employees as contractors has been going on for quite some time now – mostly for health insurance reasons. There is also the group of franchisees – from the local GM dealership to Burger King. All of these are small busienss – mostly so the main firm can offload inventory and keep unionization risk to a minimum. I suspect that these are the folks who are concerned about regulations – although they are not likely to move after buying a territory. I have long been in favor of regulatory ombudsmen – with local government staffing and federal funding whose purpose it is to be a kind of public defender/cop on the beat to assist small businesses in meeting requirements. This could be the case with tax compliance as well. I think the takeway from this study, however, is that small businesses don’t really have the need or ability to hardball local governments on tax giveaways. It is only the large businesses which do this.

  4. Ralph H  ::  8:44 am on June 20th, 2014:

    Thanks. The survey is interesting; I would hope the state leaders would look at it and figure out how to improve their business environment.