Insightful column by Chris Farrell for Bloomberg Businessweek entitled “Innovative States Aren’t Low-Tax States”. Worth reading!
As we did in our last two posts, Farrell looks at the actual performance of the top and bottom states on the Tax Foundation’s 2014 State Business Tax Climate Index and adds the top and bottom on the conservative American Legislative Exchange Council Rich States, Poor States rankings. He then compares those lists to Milken Institute’s State Technology and Science Index 2012 and the 2010 State New Economy Index, by the Kauffman Foundation.
He finds: “The two kinds of state rankings don’t exactly overlap. Still, going through the various lists, it’s striking how low-tax states such as South Dakota and Wyoming hold a place of pride in fiscal rankings, while such states as California and Minnesota dominate innovation lists. A spurious correlation? Probably not. In general, low-tax states have historically been dependent on natural resources or on mass production industries, relying on low costs rather than innovative capacity to gain a competitive advantage. “But innovative capacity (derived through universities, R&D investments, scientists and engineers and entrepreneurial drive) is increasingly what drives competitive success,” write the Kauffman study scholars.”
Farrell’s bottom line: “The lesson isn’t that high taxes are good or lead to dynamic growth, but that investment in human capital, technology, science, and knowledge matter in an intensely competitive global economy. The Milken Institute scholars hit the right note. “Technology and science are important to states and by extension the nation because innovation drives economic growth and bolsters the ability to compete in the global economy,” the Milken Report says. “State governments must recognize this and adopt policies that maximize their ability to innovate.” (Emphasis added.)
More evidence of a central Michigan Future theme: low cost places aren’t winning. The path that Michigan has been on for way too long of trying to become a low tax, low wage state to grow the economy hasn’t worked and almost certainly won’t in the future. Michigan does reasonably well on the Tax Foundation and ALEC rankings — 14th and 20th. And yet we are plagued by chronically high unemployment and low per capita income. Its time we pay attention to different state rankings to drive policy.