The Pulse

Three reasons you should ignore “business climate” rankings

By: - June 18, 2013 8:00 am

Supporters of the Senate’s billion-dollar-a-year tax cut proposal gave North Carolinians an earful last week about the need to improve our state’s “business climate.” Unfortunately, their comments in the debate on the tax plan reflected a measure  of business climate based on  a misleading and incomplete index manufactured by an organization dedicated to cutting all taxes, all the time and justifying it no matter what the facts might be.

Like many indices that claim to assess and compare states’ ability to compete for business investment, the Tax Foundation’s approach focuses entirely on taxes even though  a range of other policies are crucial for meeting the needs of business, creating jobs, and building a strong economy. So it’s no surprise that the results bear little resemblance to reality. 

So here are three reasons that the Tax Foundation rankings are the wrong foundation for making tax policy in North Carolina:

1.       They focus exclusively on cherry-picked tax policies the Tax Foundation just doesn’t like, rather than on the whole range of factors that genuinely drive business investment decisions.

Perhaps most troublingly, the Tax Foundation index simply chooses elements of tax policy it likes least, like top personal and corporate income tax rates, then mixes them together—often without solid empirical evidence of their impact on economic growth—and labels the result a state’s “business climate.”  This sole focus on a state’s tax structure leads to an index that mistakenly assumes taxes are the most important factor in shaping states’ business climates, and by extension, influencing their economic strength.  Such a myopic focus on taxes doesn’t tell us important things—like if the schools are good, roads and rails are in good shape, or if the workforce has the skills needed for 21st century business.

As a result, the Tax Foundation’s rankings—and the organization’s recent misleading) testimony before the Senate Finance Committee—dramatically over-estimate the influence of taxes on economic performance.  As four senior academic economists hired by the Committee put it during their own testimony—testimony apparently ignored by the committee’s leadership—there is absolutely no consensus among real experts that supports the notion that tax cuts create economic growth.

2.       Their business climate rankings bear no relationship to actual economic performance or conditions for business success. 

Due to its single-minded focus on taxes, the Tax Foundation approach simply gives us rankings of states according to how low their taxes are, but nothing about their economic health.

For example, the state with the best business climate according to the Tax Foundation is Wyoming, yet the Cowboy State has the lowest population in the United States and is home to not one Fortune 500 company. As Jon Shure from the Center on Budget and Policy Priorities recently pointed out, “if the rankings were meaningful, the streets of Cheyenne should be crawling with CEOs.”

Similarly, Nevada—a no-income-tax state ranked as the third best business climate —has an unemployment rate of 9.6 percent, highest in the nation and significantly more than the 7.7 percent  rate in New York, the state ranked as having the worst business climate. So much for the predictive power of the Tax Foundation rankings for economic growth.

3.       The business climate rankings are glaringly different than other business climate rankings, even those produced similarly conservative  organizations.

How can North Carolina be ranked  44th in business climate by the Tax Foundation but in the top 5 states for business nine of the past 10 years according to Site Selection Magazine? Or 22nd in tax and economic competitiveness in 2013 according to the rightwing American Legislative Exchange Council?

Part of the problem is that the Tax Foundation study doesn’t even accurately report the actual amount of taxes that businesses pay in a state. As Peter Fisher notes:

“Rather than measuring what businesses actually pay, [it] instead focuses on selected characteristics of the tax code while ignoring significant features.  Results differ wildly from a ranking based on what businesses pay in many cases.”

As a result, “In some cases, lower taxes actually produce a worse score” in the Tax Foundation rankings. No wonder the Tax Foundation provides such wildly different results from other rankings and from economic reality.

Bottom line:-these rankings are way too meaningless to be used to set policy for the state of North Carolina.  North Carolina needs a more careful approach based on what it actually takes to build a strong economy where businesses and families can thrive.

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