What’s New?


Tax Foundation Releases 2017 State Business Tax Climate Index

The Tax Foundation released the 14th edition of its State Business Tax Climate Index (SBTCI) today (Sept. 28). The basic flaws that have rendered it of little use as a guide to state economic policy remain. While a few methodological tweaks have been made, it is still a hodge-podge of over 100 different features of state tax law, mashed together into an index number. The components are weighted illogically, and the result is a ranking that bears little or no relation to the taxes businesses actually pay in one state versus another.

The Tax Foundation acknowledges that they are not measuring actual tax levels on business, but rather the states’ tax structure. But they provide no evidence that tax structure influences business decisions. If you were a business, what would you care more about: the bottom line amount you will pay, or whether there were three tax brackets or five tax brackets involved in the calculation that got you there? The Tax Foundation would have you count brackets, and ignore the dollars.

The SBTCI has separate components for the corporate income tax, the individual income tax, property taxes, etc. So let’s consider the corporate tax component. Even as a measure of “structure” somehow, it falls short because it leaves out two major determinants of corporate income tax liabilities – federal deductibility and the apportionment rule– while including numerous minor features. As a result, the corporate tax index is a meaningless number.

Furthermore, the corporate income tax is much less important than the property tax, for most businesses. According to the Council on State Taxation, the property tax accounted for 43 percent of all business taxes, the corporate income tax just 11 percent, in 2014. Yet in coming up with the overall state rankings, the latest Tax Foundation index weights the property tax 14.9 percent, the corporate income tax 19.7 percent. That makes states with high property taxes and low corporate income taxes look much better on the index than they really are, and penalizes the states with a robust corporate income tax, a high state share of education funding, and low property taxes.

To make matters worse, the index weights change every year. This makes it impossible to know if a change in a state’s rank from one year to the next is due to a change in tax law, or just a change in the weights.

More importantly, the whole focus on business tax competitiveness is misplaced. State and local taxes are a very small share of overall business costs. What really drives state growth is the rate of new business formation. And what matters most for entrepreneurial vibrancy is the education level of the state’s residents.

New Evidence that High Taxes Don’t Drive out Millionaires

A new report sheds light on the debate about whether high state taxes cause millionaires to flee to low-tax states.1 The conclusion: With the possible exception of Florida, taxes seem to have no effect on the migration decisions of the rich. In the words of the authors: “[O]utside of Florida, differences in tax rates between states have no effect on elite migration. Other low-tax states, such as Texas, Tennessee, and New Hampshire, do not draw away millionaires from high-tax states.” As for Florida, “It is difficult to know whether the Florida effect is driven by tax avoidance, unique geography, or some especially appealing combination of the two.” The authors conclude that taxes on the rich could be raised substantially and the result would be a substantial increase in revenue, not a loss. The Urban Institute’s Howard Gleckman has provided a summary of the research.

1 “Millionaire Migration and Taxation of the Elite.” Young, Cristobal; Varner, Charles; Lurie, Ithai Z.; Prisinzano, Richard. American Sociological Review. June 2016, Vol. 81 Issue 3, pp. 421-446.

ALEC Releases 9th Edition of Rich States, Poor States

The latest edition of ALEC’s Rich States, Poor States has been released. The centerpiece is the Economic Outlook Ranking, which is ALEC’s scoring of states on 15 measures reflecting ALEC’s preferred policies towards business. The flawed methodology remains unchanged from previous editions. The index purports to predict which state economies will perform the best, but in fact there is no relation between a state’s score and how well the economy grows subsequently.

Since the first edition in 2007, it remains the case that ALEC’s “best” states — the ones with the highest rankings — are actually poorer on several measures than the supposedly “worst” states. The graph below has been updated to reflect the 9th edition rankings and the latest income data. Read more..

Basic RGB

ALEC Lauds Tax Cutting States

Once again ALEC is pushing their discredited notion that tax cuts are a potent tool to promote state economic growth. While the preponderance of serious research indicates that cuts to a state’s income tax or its business taxes have little positive effect on a state’s economy, and may well prove harmful to the long term prospects for growth and for increased prosperity, ALEC continues to push their anti-tax anti-government agenda. The latest effort is their State Tax Cut Roundup for the 2015 legislative session.

ALEC lays out in this report their principles of good tax policy, based for the most part on standard economic principles of taxation (transparency, simplicity, neutrality, fairness, reliability, and revenue adequacy), plus the need for balance between state and local governments, and their favorite: pro-growth policies, or economic competitiveness. As in other ALEC reports on tax policy, however, the discussion here is exclusively on their notion of pro-growth tax policy – tax cuts of pretty much any variety. It is, after all, the Tax Cut Roundup, but there are no corresponding ALEC reports called the “State Tax Fairness Roundup” or the “State Tax Revenue Adequacy Roundup.”

The recent experience of Kansas should be caution enough against tax cutting as economic policy. For advocates of income tax cutting, Kansas was to be the poster child. Governor Sam Brownback signed legislation in 2012 slashing income taxes and cutting the state budget by over 13 percent. The tax cuts had been pushed by Stephen Moore and by Arthur Laffer, author of ALEC’s Rich States, Poor States, who argued they would provide an “immediate and lasting boost” to the economy. But instead of boosting the economy, Kansas GDP actually declined by 1.1 percent in 2013, the first year of the tax cuts, while nationally GDP grew at 1.3 percent. In 2014, Kansas growth once again lagged the nation, 1.4 percent versus 2.2 percent. Estimates for 2015 show the trend continuing, with state GDP growth expected to be just half of the national rate. Read more.

That the underlying ALEC agenda is to shift taxes from upper to lower income groups becomes clear when one contrasts their statement of tax fairness in the State Tax Cut Roundup with the tax policies they actually favor. The principle stated by ALEC is: “The government should not use the tax system to pick winners and losers in society, or unfairly shift the tax burden onto one class of citizens. The tax system should not be used to punish success or to “soak the rich,” engage in discriminatory or multiple taxation, nor should it be used to bestow special favors on any particular group of taxpayers.”

So how do ALEC’s policy prescriptions stack up against the concept of fairness? A state tax system that did not alter the distribution of income, as they supposedly favor, would be a proportional system: it would take the same percentage of income from every income group. However, most state tax systems are regressive: they take a larger percentage of income from lower income groups, because they are dominated by sales, excise and property taxes, and an income tax generally of only modest progressivity. Yet ALEC invariably applauds income tax cuts, which would make a state’s system more regressive, moving the state further from the goal of neutrality with respect to income distribution. Apparently shifting taxes from upper to lower income groups is the fair thing to do according to ALEC.

State Policies Should Focus on Homegrown Jobs

2-3-16sfp-f1A new report by Michael Mazerov and Michael Leachman finds that the vast majority of new jobs in a state are homegrown: They are created by start-ups and by firms already in the state who are expanding. Only 13 percent of new jobs come from new branch plants of out-of-state companies, or  actual plant relocations to a state. They argue that public policies need rethinking as a result:

“State economic development policies that ignore these fundamental realities about job creation are bound to fail. A good example is the deep income tax cuts many states have enacted or are proposing. Such tax cuts are largely irrelevant to owners of young, fast-growing firms because they generally have little taxable income. And, tax cuts take money away from schools, universities, and other public investments essential to producing the talented workforce that entrepreneurs require. Many policymakers also continue to focus their efforts heavily on tax breaks aimed at luring companies from other states — even though startups and young, fast-growing firms already in the state are much more important sources of job creation.”

Michael Mazerov and Michael Leachman. State Job Creation Strategies Often Off Base. Center on Budget and Policy Priorities, February 3, 2016. http://www.cbpp.org/research/state-budget-and-tax/state-job-creation-strategies-often-off-base#_ftn23