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,
-- the states that comprise the index’s bottom ten. (The Empire State is dead last.)
accustomed to winning the foundation’s tax-climate gold medal, triumphs again. South Dakota, Nevada, Alaska, Florida, Washington, New Hampshire,
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
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
does not have a state-level sales tax, and repealed its personal-income tax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
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
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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