The Tax Foundation provides a timely reminder of how tax policies influence economic vitality. As the TF map below shows, most states exempt manufacturing machinery from sales taxes. There’s a good reason for that.
TF analyst Katherine Loughead writes,
When businesses pay taxes on inputs, the costs of production rise, resulting in some combination of higher prices for consumers, less business expansion, and fewer job opportunities. This concept is known as “tax pyramiding,” whereby the sales tax is assessed multiple times throughout the production cycle…
Eliminating taxes on manufacturing machinery and other business inputs is one way states can make strides in becoming more attractive for business investment, while making progress toward a more properly-functioning consumption tax.
For a broader discussion of the issue, we recommend a 2017 Washington Research Council report, Using Tax Policy to Promote Economic Vitality. The WRC writes,
A large percentage of Washington’s tax revenues comes from businesses, which makes it especially important that we adjust the code so that it treats businesses in a fair and pro- ductive way. The vast majority of these tax preferences simply serve to level the playing field for the state’s businesses and to improve tax policy…
Tax adjustments are a valuable policy tool that allows state government to reduce inequities in the tax system and create incentives, both of which make Washington more competitive in the world and among the fifty states. These policies maintain and attract new high- quality jobs, which in turn multiply into more jobs in the economy, while drawing tax revenues to the state which might otherwise go elsewhere.
The large number of national firms that have originated and first thrived here attests to a success formula that includes entrepreneurial vision, a productive workforce, and a tax code which, while not perfect, fosters business and job for- mation leading to substantial economic growth.
The report provides an clear overview of Washington’s tax policies, including an examination of the revenue department’s Tax Exemptions Study, comparative analysis of the state’s tax overall and business tax burdens, and brief discussion of major tax policies affecting manufacturing and R&D machinery and equipment, research and development, data centers, and aerospace.
This is complex stuff, well explained. And well worth the attention of lawmakers in the weeks ahead.