D. Dowd Muska


Where Capitalism Is -- and Isn’t -- Welcome

October 11, 2012

Keep doing what you’re doing, keep getting what you’re getting.

That’s the lesson of the Tax Foundation’s “2013 State Business Tax Climate Index.” The D.C.-based nonprofit annually examines the major taxes America’s “laboratories of democracy” assess on companies and entrepreneurs. This year’s edition offers confirmation that governors and statehouse lawmakers with a reputation for being stuck on stupid haven’t changed, while their pro-growth colleagues remain committed to effective economic development.

“The modern market is characterized by mobile capital and labor,” write authors Scott Drenkard and Joseph Henchmen, “with all types of business, small and large, tending to locate where they have the greatest competitive advantage.” It’s a reality-based observation lost on “leaders” in New York, New Jersey, California, Vermont, Rhode Island, Minnesota, North Carolina, Wisconsin, Iowa, and Maryland -- the states that comprise the index’s bottom ten. (The Empire State is dead last.)

Wyoming, accustomed to winning the foundation’s tax-climate gold medal, triumphs again. South Dakota, Nevada, Alaska, Florida, Washington, New Hampshire, Montana, Texas, and Utah round out the top ten.

Drenkard and Henchman acknowledge that taxes aren’t the only factors that influence decisionmaking in the productive sector. Healthcare expenses, proximity to customers and suppliers, and competent workers matter, too. But governments’ looting of enterprises plays a far bigger role in business strategy than subsidized “economists” and liberal activists believe: “Most importantly, taxes diminish profits. If taxes take a larger portion of profits, that cost is passed along to either consumers (through higher prices), employees (through lower wages or fewer jobs), or shareholders (through lower dividends or share value).”

The index unpacks the levies placed on personal income, corporate income, property, sales, and unemployment insurance. States that lack one or two of the key revenue-raising mechanisms stand out. Wyoming, Nevada, and South Dakota refuse to impose a tax on both corporate and personal incomes. Alaska does not have a state-level sales tax, and repealed its personal-income tax decades ago. Florida does not tax personal income, while New Hampshire and Montana have yet to enact sales taxes.

For the taxes that do exist, low rates and broad bases are best. Simplicity discourages evasion and reduces compliance hassles. As for perks and privileges for politically correct projects, Drenkard and Henchman aren’t fans. The political class, they scoff, crafts corporate-welfare schemes “under the banner of job creation and economic development, but the truth is that if a state needs to offer such packages, it is most likely covering for a bad business tax climate. Economic development and job creation tax credits complicate the tax system, narrow the tax base, drive up tax rates for companies that do not qualify, distort the free market, and often fail to achieve economic growth.”

There are dozens of ways to investigate the performance of states that score well, and poorly, on the foundation’s ranking. Let’s explore two metrics: job recovery since the end of the Great Recession and where Americans moved in the first decade of the 21st century.

The present recovery began in June 2009. While the gain in national employment has been anemic since then, according to the Bureau of Labor Statistics, the 2013 State Business Tax Climate Index’s high achievers are superior job-creators. New positions in the top ten are outpacing increases in the worst states by 71 percent. (Texas and Utah, for example, expanded jobs by 5.5 percent and 4.3 percent, respectively. Only two dunce-cap states -- Vermont and New York -- surpassed growth of 2 percent.)

Taking a longer view, states that tax businesses lightly are enjoying enormous domestic immigration. Using IRS data, the Tax Foundation has posted an inflow-outflow calculator. The website catalogs “the number of returns that have moved from one state to another,” tracking the exemptions claimed, which is “closely correlated with the movement of individual persons.”

Among the index’s champions, only one -- Alaska -- experienced net domestic outmigration between 2000 and 2010. The remaining nine saw a hefty 2.3 million Americans relocate within their borders. The bottom ten business-tax climates lost a net 2.5 million citizens. (North Carolina alone experienced a population gain.)

The Tax Foundation avers that its index “is an important and useful tool for policymakers who want to make their states’ tax systems welcoming to business.” But there’s little doubt that pols and bureaucrats who embrace class warfare, unaffordable “public goods,” and central planning will blissfully ignore the analysis’s obvious lessons. Meanwhile, entrepreneurs and the opportunities they generate will gravitate toward the nation’s friendliest environs.

The laws of economics -- so pesky. And so immutable.

D. Dowd Muska (www.dowdmuska.com) writes about government, economics, and technology. Follow him on Twitter @dowdmuska.

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