The irrelevance of business tax rankings

A thought experiment: State A has an unemployment rate of 6.7% and its per capita income is nearly $42,000. State B has an unemployment rate of 10.5% and its per capita income is above $32,000. Which state’s economy do you prefer? Of course, the answer is obvious. Now add the fact that the Tax Foundation ranks State A 44th in its corporate tax index and State B is ranked 9th. Change your opinion of which you prefer?

Hardly any Michiganian would trade lower unemployment and higher incomes for a better business tax ranking. But apparently not the editorial writers at the Detroit News. The Tax Foundation rankings are the central data they provide that enacting Governor Snyder’s business tax cut proposal is the key to more jobs and higher wages. The News claims that: Well, fixing Michigan’s anti-business tax structure is the only way to create jobs. Try telling that to residents of South Carolina (State B) with the “good” tax ranking and the high unemployment, low income economy.

As I detailed in a 2009 column in Dome there is no correlation with how a state fares in the various tax rankings and their actual economic performance. The pattern is that in all these rankings top ranked states have both good and poor economies. The same is true for bottom ranked states.

The Tax Foundation themselves understand that business taxes cannot be measured only by the corporate tax and that they are not determinative of economic performance. Their 2011 State Business Tax Climate Index  ranks Michigan as the 17th best. Our low score in corporate taxes is more than offset by  having top 12 rankings in both the income tax and sales tax. But the important point isn’t that some think tank  believes that we have a “bad” corporate tax and a “good” sales and income tax. It is that even with a ranking as the 17th best by a right of center think tank Michigan had the worse economy in the country for more than a decade. Their ranking had nothing to do with actual economic performance.

Why? As the Tax Foundation writes : Clearly, there are many non-tax factors that affect a state’s overall business climate: its proximity to raw materials or transportation centers, its regulatory or legal structures, the quality of its education system and the skill of its workforce, not to mention the intangible perception of a state’s “quality of life.”

Of course, the Tax Foundation is right. Transportation, education, human capital and quality of place are key factors in determining whether a state is prosperous or not. It is those factors that propels Minnesota (State A) to low unemployment and high income. And it is our deficits in those factors that are major reasons why Michigan has, like South Carolina, high unemployment and low income.

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