Good Jobs First today released a
new study debunking
so-called “business climate indexes” and showing them to be cover for an
ideological agenda of cutting taxes and cutting wages.
“Grading Places: What Do Business Climate Indexes Really Tell
Us?” is written by University of Iowa emeritus professor Peter Fisher, a
well-known expert on investment incentives and fiscal policy, with a preface by
Good Jobs First director Greg LeRoy.
This is an ambitious study that analyzes six different
indexes published by five different groups. Four are simple combinations of a
wide variety of policy variables, each with its own idiosyncratic weighting
systems, all of which are published by conservative organizations such as the
Tax Foundation or the American Legislative Exchange Council (ALEC).
Two use “representative firm” models to attempt to calculate
the tax burden on different types of companies in each state. One is sponsored
by the Tax Foundation, the other by the Council on State Taxation.
Since
Good
Jobs First just
knocked
out the ALEC study in December, and because the Tax Foundation index is far
more widely cited (at least 3 times as much, according to searches of the premium
Nexis news database; subscription required), I am going to focus primarily on
the critique of the Tax Foundation’s State Business Tax Climate Index (SBTCI).
The SBTCI measures 118 features (p. 49) of state tax law
grouped in five categories (p. 50): personal income tax (33.1% of the index),
sales tax (21.5%), corporate income tax (20.1%), property tax (14.0%), and
unemployment insurance tax (11.4%). As the study shows, these weightings are
the source of the most mischief. They are based on the variability of each
factor among the states; that is, personal income tax varies the most, and so
on.
However, a study by Ernst & Young for the Council on
State Taxation determined the actual percentages that businesses pay in state
and local taxes, based on analyzing tax returns. Counting the five taxes listed
above, the costs are: property tax, 45.9%; sales tax, 30.8%; corporate income
tax, 8.7%; unemployment insurance tax, 7.7%; and personal income tax, 6.7% (p.
51).
It won’t surprise you that using the Tax Foundation data
with the Ernst & Young weights gives you a very different ranking of the
states, with “six states’ ranking changing 20 or more positions, and another 11
states by 10 to 19 positions” (p. 51). In fact, there is essentially no
correlation between the Tax Foundation’s ranking and the one constructed by Fisher
(-.05, to be exact). In other words, the Tax Foundation’s tax ranking tells you
literally nothing about business taxes paid as a percentage of gross state
product.
If that is so, what is the whole point of the Tax Foundation
exercise? Fisher does not mince words (p.51):
But
the TF sticks with its system because it enables the Foundation to heavily
penalize states with more progressive tax systems above all, while concealing
this objective in an arbitrary system of scaled and weighted numbers.
As if this were not enough, the four simple indexes produce
widely varying scores: Massachusetts ranks from best on the Beacon Hill Institute’s
State Competitiveness Index, 22nd on the Tax Foundation’s State
Business Tax Climate Index, 26th on ALEC’s Economic Outlook Ranking,
and 38th on the Small Business and Entrepreneurship Council’s U.S.
Business Policy Index (p. 68).
In some ways, this could be considered a feature, and not a
bug. As Peters explains (p. 68), “Conversely, those arguing for lower taxes
could find, in 39 states, a measure that ranks them in the highest 15 states,
and 27 could find a measure placing them in the highest 10.”
The bottom line is that, like the ALEC report analyzed in December,
these indexes are designed to pressure state governments into lowering taxes, even if that requires cutting
spending that benefits business throughout the state (such as a university
system); and putting downward pressure on wages, even though it is hard to see
how you create a prosperous state based on low-wage jobs.
