The irrelevance of tax rankings again

In a March 2011 I wrote a post about how the Tax Foundation’s rankings compare to state economic well being. I did something similar in a column for Dome in 2009. Both presented data that doing well in business climate rankings have little or nothing to do with how well a state’s economy is performing.

Its that time of year again to revisit whether business climate ratings tell us anything about economic success. The well respected Tax Foundation has just released their 2013 Business Tax Climate Index. Michigan now is 12th in the overall rankings and 7th in corporate taxes. The question we should all be asking is “does this mean that Michigan now or in the near future will have a good economy?” Doing well in the rankings and not well in employment and personal income isn’t success.

Just ask Michigan and Michigan State football fans how comforted they are that the “experts” in the preseason polls ranked their teams as the 8th and 13th best in the country. Ultimately what matters is the results. The same should be true for the economy.

Lets repeat the thought experiment from my 2011 post: State A has an unemployment rate of 5.9% and its per capita income is nearly $43,000. State B has an unemployment rate of 12.1% (the highest in the nation) and its per capita income is nearly $37,000. Which state’s economy do you prefer? Of course, the answer is obvious. Now add the fact that the Tax Foundation ranks State A 45th overall and 44th in its corporate tax index and State B is ranked 3rd and 1st. Change your opinion of which you prefer?

Hardly any Michiganian would trade lower unemployment and higher incomes for a better business climate ranking. Nor would residents of Minnesota (State A) trade places with residents of Nevada (State B). Nor would Minnesota’s residents trade places with those of us in Michigan where the unemployment rate is 9.4% and per capita income is nearly $35,000.

Maybe the Tax Foundation rankings are better at predicting future economic success. Minnesota in the 2009 rankings released in the fall of 2008, just before the collapse of Lehman Brothers and then the American economy, was ranked 41st overall and 44th in the corporate tax index. Nevada was ranked in 2009 3rd and 1st. The rankings sure didn’t predict the economic well being of the residents of those states four year later.

What I wrote last year remains true today: “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.”

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