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08 November 2010

The 2011 State Business Tax Climate Index from the Tax Foundation

Kail M. Padgitt, of the Tax Foundation produced the 2011 State Business Tax Climate Index in October.  The report evaluates the effects of state taxes of the following types with the relative weighting following as a percentage:
  • Individual Income Tax, 29.64%
  • Sales Tax, 25.16%
  • Corporate Tax, 19.35%
  • Property Tax, 14.57%
  • Unemployment Tax, 11.28%
The results of the evaluation are shown in the map below by rank:

In the scoring, the average was set at 5.00 on a scale of 10.00.  I have made up two tables giving the score of each state assigned by the Tax Foundation Study and its rank for 2011 and the rank for 2010.  To this I have added my calculated growth in the state's Gross State Product from 2005 to 2008.  I have also indicated the party in control of the governor's office, the State House, and the State Senate in 2010.

The highest ranked three states, South Dakota, Alaska, and Wyoming, stand out from the other states with their high scores.  The second set of three states, Nevada, Florida, and Montana, also enjoys some significant separation from the other states.  Then New Hampshire and Delaware stand out a bit also.  Beyond that, very small differences in state scores can mean changes of several rank positions, until you get to the bottom 7 positions beginning with Maryland.

Do high taxes discourage the growth of the state Gross State Product (GSP)?  The top 10 ranked states grew by an average of 17.59% from 2005 to 2008, while the bottom ten states grew by 13.36%.  Low taxes provided a 4.23% growth rate advantage to the low tax states in that three year period.  Let us do the math to find the effect this difference in growth would have over 5 three year periods:  1.1759 to the fifth power is 2.248, while 1.1336 to the fifth power is 1.8720.  The difference is that the low tax state economies become 2.25 times larger, while the high tax economies become 1.87 times larger.  Such growth differences matter to the quality of the People's lives.

Let us examine if there is any difference in tax ranking that correlates with the party holding power in the states.  Of course, the 2010 powers that be were not likely to have instantly changed many state taxation traditions, so the duration of control by a given party is also important.  But to keep things simple, we will just consider the party in power in 2010.  Besides, according to Judge Napolitano on Fox Business on Sunday, there is only one party, the Big Government Party, so we should find equality in this tabulation if he is right.  For the top 10 states in the business tax ranking, counting 1 for each case of control of a governorship, house, or senate, the Republicans score 17 and the Democrats score 11.   For the bottom 10 states, those with the worst business taxes, the score is Republicans 6, Democrats 24.  Sorry Judge Napolitano, but on the matter of the business tax climate, it appears that it matters quite a bit which party controls a state.

Of course, there are exceptions.  For instance, Arizona was controlled in all three state government components by Republicans and yet it was in the 34th position and had actually fallen from the 28th position in 2010.  Bad Republicans in Arizona!  I will also chide Oklahoma, where much of my family lives and where I graduated from high school.  Oklahoma has generally been a Republican state for a couple of decades now, but it ranked only 30th among the states.  With Texas (13), Colorado (15), and Missouri (16) on its borders, it is surely losing many businesses to those nearby states with much higher rankings.  In rankings that consider the regulatory environment as well, Oklahoma does better in the ranking, but still there is a clear need for improvement here.

Speaking of the border effect, the state of Maryland is pursuing an insane high tax strategy as well.  It is ranked 44, but Delaware (8), Virginia (12), and Pennsylvania (26), and even West Virginia (37) are all on its borders and offer better business tax climates.  This is why Northrop Grumman, with large operations in Maryland, just moved its headquarters to Virginia which just improved its ranking by three positions.  Virginia was chosen as the #2 best state for business by CNBC, who picked Texas #1.  Virginia's governor says Virginia is coming after Texas and will take over the #1 spot.  Maryland is not in the race and couldn't give a fig.  Maryland's expertise is in suckling at the teats of the federal pig and living off the taxpayers from across the entire country.

Looking at the map above, it is very noticeable that New Hampshire, Delaware, Virginia, Florida, Texas, and Indiana are each states that have much better business tax climates than any of the states on their borders.  They are each sucking in businesses from the nearby states and helping their homegrown businesses to succeed in the most effective manner: by not putting burdens on them with high taxes.  States using limited time tax incentives or offering training to the employees of industries the state has picked as winners are not as effective in growing businesses and jobs as those who leave all this to the private sector.  Dell Computer had a four-year special tax break from the state of North Carolina for a facility, for instance, and has now announced that it is leaving the state when the four years are up.  This is not surprising.  North Carolina is ranked #41, so it makes sense for Dell to go back to Texas at a #13 ranking or maybe move that facility to Florida with its #5 ranking.

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