Good business climate, not so good economy continued

As we explored in my last post, Michigan is now a top tier state in ratings of business climate, but a lower tier state in what matters to Michiganders: jobs and income.

For at least two decades we have been told by most policy makers and businesses that reducing the cost of doing business in Michigan is the key to more and better jobs. Particularly lowering business taxes. First the Single Business Tax and then the Michigan Business Tax. So-called job killers.

A  key to Michigan’s rise in business climate rankings was terminating the MBT and eliminating state taxes on most Michigan businesses. We were promised more and better jobs by both policy makers and the business lobby in Lansing. How has it worked? Not so well. Three years after repealing the MBT Michigan is in the bottom ten in both the proportion of working age adults with a job and per capita income minus government transfer payments.

Turns out that lowering, if not eliminating state business taxes for most, is not a good way for creating more and better jobs. And businesses themselves know this. Crain’s Detroit Business in reporting on a survey they recently commissioned along with Honigman Miller Schwartz and Cohn LLP writes: “But 73 percent of businesspeople thought Snyder’s tax reforms either had no influence at all or only a minor influence on their own companies’ decisions to hire employees or increase wages.” (Emphasis added.)

Businesses primarily create jobs based on customer demand. And primarily set wages based on the supply and demand of the skills they need. Lower business taxes influence neither. (Remember Michigan had an unemployment rate below four percent, wages above the national average and labor shortages in the late Nineties when the dreaded Single Business Tax was in full force.)

What lower business taxes do is increase marginally (state business taxes are never a high proportion of business revenue) corporate profits and top executives’ income. And reduce state revenue that can be used to invest in what really matters to economic growth––infrastructure, human capital development and creating communities that people want to live and work in––and/or raise taxes on others (think pension tax and reducing the Earned Income Tax Credit).

(For those interested in more on the topic of taxes and economic growth see Doug Drake’s terrific report: Michigan’s Tax Policies: Wrong Turns on the Path to Prosperity.)

As we have written frequently its those public investments that prepare, retain and attract talent that allow Minnesota to have the Great Lakes lowest unemployment and highest per capita income despite being ranked in the bottom ten states in business climate. That is the best path back a prosperous Michigan.

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