Eliminating the Income Tax Would Help Oklahoma Entrepreneurs
May 3, 2012
Previously in these pages we have used a powerful new database of Oklahoma’s businesses—the National Establishment Time-Series (NETS) Database1—to examine Oklahoma’s business climate. This database allows us to study the three avenues of job creation:
- The births of new establishments and the deaths of existing establishments;
- The in- and out-migration of business establishments; and
- The expansion and contraction of existing establishments.
The time-series concluded that the jobs associated with new establishments (births)2 minus the jobs lost when an existing establishment ceases (deaths)3 account for nearly all of the year-to-year fluctuations in employment.
This article updates and reaffirms those previous results, and discusses how eliminating Oklahoma’s income tax would be a boon to these all-important business start-ups.
Quantifying Oklahoma’s Business Climate
As shown in Table 1, Oklahoma created 159,210 jobs between 1995 and 2009—an increase of 9.6 percent. Table 2 shows that Oklahoma’s job creation ranked as the 30th best in the country, and 4th regionally.
Table 1 also shows that births accounted for, on average, 82,800 jobs created in the years between 1995 and 2009, while establishment deaths accounted for 92,879 jobs lost—leaving an average annual job loss of 10,080. Over the entire 15-year time period examined in this article, net establishment births and deaths in Oklahoma saw 141,114 jobs lost—with nearly all of those losses occurring during the recent “Great Recession.”4
As shown in Table 3, Oklahoma’s net job creation from births and deaths ranked very poorly both nationally (38th) and regionally (6th).
Table 1 shows that Oklahoma’s year-to-year fluctuations in employment are significantly affected by the net job creation from births and deaths. In fact, the two are 93 percent positively correlated—which means they virtually move lockstep in the same direction.
In fact, in the five years that total employment is negative, so is the net job creation from births and deaths. Additionally, the drop in jobs from net births and deaths is greater than the drop in total jobs—strongly suggesting that the drop in jobs due to births and deaths leads the drop in total jobs.
Overall, this analysis shows that the births and deaths of establishments significantly explain the year-to-year job fluctuations.
Helping Oklahoma’s Businesses
This updated study again confirms that—although other avenues of job creation (in-migration of new businesses, for example) are important—it is in fact net jobs created from births and deaths which best explains total job creation. When comparing Oklahoma nationally and regionally, job creation from births and deaths is below average, so revving up the job creation engine in this regard is critical.
How might policymakers help encourage entrepreneurs to start new businesses, or help save existing businesses from going under? One way is to increase the after-tax income of these businesses by eliminating the state personal income tax, because sole proprietorships, LLCs, partnerships, and S-corporations file through the personal income tax code.
In fact, according to 2009 IRS data, there were 267,360 Oklahoma taxpayers claiming business income (such as sole proprietorships, worth $2.2 billion) and 89,274 taxpayers claiming partnership/S-corporation income (worth $3.9 billion).5
Additionally, sweeping away the income tax and all of its ensuing paperwork would dramatically lower tax compliance costs on entrepreneurs—time and money better spent on business matters.
Economists J. Scott Moody (M.A., George Mason University) and Wendy P. Warcholik (Ph.D., George Mason University) are OCPA research fellows.
1 NETS is based on the far-reaching Dun & Bradstreet Marketing Information file that tracked more than 41.7 million establishments nationwide between 1989 and 2009. The file tracks businesses via an assigned “DUNS number,” which is the business equivalent of a personal Social Security number. The NETS database is the most comprehensive establishment-level census available. The firm Walls & Associates performs the conversion of the Dun & Bradstreet Marketing Information file into a time-series database that is useful for economic research purposes. The file is proprietary to Walls & Associates, which licenses the database to researchers across the country—including the U.S. Department of Commerce’s Census Bureau and the Bureau of Economic Analysis.
The NETS database is based on establishments, which means that one organization can have numerous establishments in various locations (e.g., Starbucks). Additionally, different establishments can occupy the same location. For example, an organization at a single location could represent two different activities—such as a single organization with both a distribution and a retail establishment under the same roof. This structure provides an unprecedented level of geographic and industry classification.
Though this article will use the term “Oklahoma jobs,” it does not necessarily mean that those employed are all Oklahoma residents. Since jobs are reported on a per-establishment basis, there is no information on the residency of the workforce. Therefore, someone living in Texas but working for an Oklahoma establishment would be included in the “Oklahoma employment” number.
2 Broadly, births are a useful benchmark in measuring the overall level of entrepreneurial activity. Yet, solely measuring births understates entrepreneurship since the NETS database reclassifies the organization as an existing organization in the years after the birth year. Ideally, a more comprehensive metric of entrepreneurship would track these organizations throughout the organizations’ life-spans to better understand other important issues, such as the survivor rate.
3 Closures are defined in the NETS database as the elimination of a DUNS number. However, DUNS numbers may also be eliminated by one organization absorbing another organization. As a result, some jobs lost due to closures will reappear in the database as expansions of existing organizations. This bias will lead to some overestimation of jobs lost to births and deaths.
4 This study draws on data for national comparisons from YourEconomy.org (YE), which is based on the national NETS database. YE is a project of the Edward Lowe Foundation. For technical reasons, the YE website uses the NETS database for the years 1995 to 2009.
5 Some taxpayers may have multiple types of businesses, so the numbers are not necessarily additive. IRS state data can be found at http://www.irs.gov/taxstats/article/0,,id=171535,00.html.