CATO Institute has published its “Fiscal Policy Report Card on America’s Governors 2012” (link). Page 8 is where it get interesting for me, in a section called “Tax Incentive Disease”. Hungry for revenue, states have raised taxes on businesses to levels so high that hardly anyone wants to do business in those states. The fix then becomes special-purpose tax exemptions and other incentives, with Wisconsin having 170 such patches. In Illinois the tax breaks are handed out on a company-by-company basis (see top of page 10) and only fairly big companies, e.g., Sears and Motorola, are big enough for politicians to want to negotiate with.
[This is consistent with my experience running a small company (about 80 employees) in the U.S. I was never able to find a clever way to avoid paying any state or local tax. We were never able to avoid paying the advertised (world’s highest) federal corporate income tax rate.]
A bizarre practice noted by the CATO report is state taxes on health care providers that are then immediately rebated to those same health care providers (see page 10). States wire money back and forth between their treasuries and hospitals in order to “apply for an receive more federal matching funds.”
For those who have believed newspaper reports that state governments are spending less, the report’s Figure 2 shows “total state and local government spending”, which has risen from 2.08 trillion in 2007 to $2.29 trillion in 2011 and 2012 (estimated). There was no year in which state and local government spending fell.
How’s the future fiscal health of states looking? The report cites an analysis that state pension funds are underfunded by about $10 trillion (page 13).