Making State and Local Taxes “Friendly” to Small Businesses

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 Thumbtack.com 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.