If You Like Desolate, Empty States. . . .

Did you know that "Absence of Income Tax is Key to State Competitiveness"? Well, so it is according to the headline of Cato's Daniel Mitchell writing up a report from the anti-tax Tax Foundation's report on which states are best for business.

Of course, according to this metric the best places to do business in the United States are . . . Wyoming and South Dakota. Bringing up the rear, by contrast, are prosperous states full of successful businesses -- California, New York, New Jersey, and Delaware.

Comments

For a state in the middle of nowhere, South Dakota has a remarkable financial services sector.

Posted by Chris | October 13, 2007 4:07 PM

...and no anti-usury laws.

S.D. is to consumer lending what Delaware is to incorporation.

Posted by Davis X. Machina | October 13, 2007 4:09 PM

Usury! Yes!

Posted by southpaw | October 13, 2007 4:21 PM

Richard Posner on Milton Friedman:

I find slightly off-putting what I sensed to be a dogmatic streak in Milton Friedman. I think his belief in the superior efficiency of free markets to government as a means of resource allocation, though fruitful and largely correct, was embraced by him as an article of faith and not merely as a hypothesis. I think he considered it almost a personal affront that the Scandinavian nations, particularly Sweden, could achieve and maintain very high levels of economic output despite very high rates of taxation, an enormous public sector, and extensive wealth redistribution resulting in much greater economic equality than in the United States. I don't think his analytic apparatus could explain such an anomaly.

Posted by Elvis Elvisberg | October 13, 2007 4:34 PM

Of course, desolation means low real estate costs too. Why, I'm considering a location in Wyoming for my new tumbleweed-to-gas extraction plant right now.

Posted by Bo | October 13, 2007 4:47 PM

It's probably worth mentioning that some of those best places are among the top state recipients of federal funding, compared to how much they contribute in federal taxes. I hope that the report took that into account.

Posted by RSA | October 13, 2007 4:49 PM

What's striking, and obvious, is that states where businesses want to locate--California, New York, and New Jersey, for example--can afford to have high taxes. Landlords who own rental properties in desirable locations can charge high rent. Politicians elected to office in desirable jurisdictions can afford to "charge" high taxes. "Desirable" Wyoming is the least populous state.

Posted by Alan Vanneman | October 13, 2007 4:59 PM

What's striking, and obvious, is that states where businesses want to locate--California, New York, and New Jersey, for example--can afford to have high taxes. Landlords who own rental properties in desirable locations can charge high rent. Politicians elected to office in desirable jurisdictions can afford to "charge" high taxes. "Desirable" Wyoming is the least populous state.

Posted by Alan Vanneman | October 13, 2007 4:59 PM

While living in ND, a friend once commented that South Dakota had won the war against education. Perhaps the lack of an income tax helped in that regard.

Posted by Mudge | October 13, 2007 4:59 PM

Yeah, state comparisons follow the standard tale of the rich getting richer, complete with evil government redistribution from the rich to the poor ones. Here in CT, we get 66 cents of federal revenues per dollar of federal tax paid, while Alabamans get $1.77. Are Alabamans really nearly 3 times more deserving than us? Won't they just buy Bibles, bullets and BBQ with our money?

Posted by Bo | October 13, 2007 5:32 PM

they rank delaware #9, dumbass. but they do rank the other three you mention 47, 48, and 49.

Posted by a commenter | October 13, 2007 5:47 PM

I am not trying to back Cato up here, but...

New York is a pretty bad example. NYC is a successful place for businesses. But upstate, which is rustbelt territory, is hurting and has a very difficult time attracting business. The population of places like Buffalo and Rochester is half what is was in the 50s.

Posted by Walker | October 13, 2007 6:03 PM

But it's not as if South Dakota or Wyoming had thriving manufacturing industries and were able to recover thanks to low taxes while upstate NY suffers because of high taxes. There are larger trends working against manufacturing in this country that are responsible for poor performance in the rust belt, and taxation just ain't one of them.

Posted by woot | October 13, 2007 6:21 PM

True, state taxes had nothing to do with the collapse of the steel industry in Buffalo, Xerox and Kodak in Rochester, and whatever used to support people in Syracuse, but you have to ask why nothing has located in these cities to replace their former industries. Could it have something to do with obscene state taxes enacted with the votes of NYC-area residents?

Areas that aren't naturally attractive to live in (e.g., California, NYC, New England) have to give people a reason to want to move there, and I just don't see many people wanting to put up with six feet of snow a year absent a bribe in the form of lower taxes or higher wages.

Posted by Don K | October 13, 2007 7:14 PM

Delaware is even more successful than south dakota in attracting credit card companies through usury friendly laws. But it also raises taxes primarily through income taxes. It has the lowest property taxes anywhere, and no sales tax, but a 7.7% income tax. Also, Delaware raises a lot of money from out of staters through a very high toll on interstate 95 and taxes on corporations that make use of delaware law.

Posted by pj | October 13, 2007 7:24 PM

report from the anti-tax Tax Foundation's report on which states are best for business. Of course, according to this metric the best places to do business in the United States are . . . Wyoming and South Dakota.

How fascinating. I wonder where the Tax Foundation decided to locate itself. Let's check:

The Tax Foundation
2001 L Street, N.W.
Suite 1050
Washington, D.C. 20036

Wow. Downtown Washington, DC. Who would have thought they'd want to work in such a terrible place to do business? Same with Cato. How do their employees get access to amenities that would only come with a thriving business environment?

South Dakota and Wyoming are such great places to do business, it stands to reason that they'd be locations of some of the top talent in the country. I wonder why they didn't go recruiting for people there.

Similarly, somewhere in the archives of Reason Magazine, a writer pointed out that Forbes Magazine was highlighting states like Kansas as the "best places to do business." Where was Forbes located? New York City, of course.

Posted by Tyro | October 13, 2007 8:22 PM

NYC and New England aren't attractive places to live? Huh?! And as a Buffalonian, I'll take our snowy winters (where it rarely gets colder than the high teens) over the winters I experienced while in college in the midwest, where the wind chills were so low that going outside could actually be dangerous. And our summer and fall can't be beat! Nobody dies in heat waves here, and when we get hit with a giant snowstorm, the city isn't washed away or anything. It just melts eventually, and meanwhile, we plow it out of the way and go about our lives. No hurricanes, earthquakes, wildfires, or tornadoes here! Just good food, people, a terrific arts and culture scene, great hockey fans, and...well, the Bills. Not a selling point these days, I know.

That said, upstate NY is not doing well, thanks to dysfunctional Albany government (conservatives who wax poetic about state governments have obviously never watched the NYS legislature in action). This area's "brain drain" is nigh-legendary, so much so that if the region became more business and commerce-friendly, I think something amazing would develop here. Sadly, the powers-that-be in Albany seem perfectly content to maintain their little power fiefdoms, so all of upstate's young talent ends up moving south and west. Ugh.

Posted by Jaquandor | October 13, 2007 8:35 PM

States with no income taxes make up for the lost revenues through other taxes. Some of them, Wyoming and Alaska for example, are lucky because they can tax the extrication of oil and other natural resources, the sort of tax that's not burdensome on residents and local businesses. Others aren't so lucky; for instance, New Hampshire has extremely high property taxes, while Washington imposes a business-unfriendly gross receipts tax.

Posted by Peter | October 13, 2007 9:00 PM

Worse still, according to the Cato summary (the original report is behind a subscription wall), the "competitive" factor that's actually being measured is "business tax climate".

So we're not seeing somebody measuring attractiveness to businesses and saying that it correlates with low taxes. We're seeing someone ranking states by how low taxes are, and then calling that attractiveness.

Posted by Avram | October 13, 2007 10:28 PM

The point of the Tax Foundation's report isn't that states with the best business tax systems will be the most prosperous places. There are many things that affect growth besides taxes. It's to evaluate which sets of tax laws around the 50 states are well-designed and which aren't. The report isn't just a simple measure of "low taxes = good, high taxes = bad." It grades the structure of state tax codes by more than 100 criteria, and the final ranking reflects that. Just because New York and California are prosperous doesn't mean their tax systems are soundly designed. The point of that report is to show lawmakers in those states how to make things better rather than worse.

Posted by Kevin | October 13, 2007 11:23 PM

I have no doubt all good liberals would pay all their taxes even if the government didn't seize them from their paychecks. Right?

Posted by Mark | October 13, 2007 11:35 PM

All California has over Greenland (the world is heating up and the left arrow on ye olde Mac doesn't work; am I a heretic for buying a new HP laptop?) is an excellent community college system, several lovely botanical gardens, and a massive pornographic industrial complex.

(You have to think that the Inuits - being indian types - don't have to pay much taxes [with the caveat of having to suffer continued humiliation from foreign dominion] but if they happen to discover some rich oil reserves those Greenlanders will be "sittin' pretty all the time," won't they?)

Posted by Linus | October 13, 2007 11:38 PM

"I have no doubt all good liberals would pay all their taxes even if the government didn't seize them from their paychecks. Right?"

Would I knowingly evade my taxes? No
of course not, that would be dishonest. Actually, every year I end up owing the government when tax time comes, and I pay. So I've alreay passed that test.

Posted by mad6798j | October 14, 2007 2:14 AM

"The point of the Tax Foundation's report isn't that states with the best business tax systems will be the most prosperous places. There are many things that affect growth besides taxes. It's to evaluate which sets of tax laws around the 50 states are well-designed and which aren't. The report isn't just a simple measure of "low taxes = good, high taxes = bad." It grades the structure of state tax codes by more than 100 criteria, and the final ranking reflects that. Just because New York and California are prosperous doesn't mean their tax systems are soundly designed. The point of that report is to show lawmakers in those states how to make things better rather than worse.

Posted by Kevin | October 13, 2007 11:23 PM"

When you do an empirical study on such issues and fail to find a strong correlation between you hypothesis (low taxes lead to strong business environments) and the results (strong economic growth), you have failed to find real causality in the real world. If there is too much noise in the empirical data to establish a trend backing up your hypothesis, either your hypothesis is wrong or the trend you are after is so minor that it gets crowded out by other effects. All things being equal, businesses would probably prefer lower tax rates when deciding where to invest, but all things are never equal. A state that has low taxes but then spends little on education as a result will not likely be attractive to investors. A major car manufacturer (Toyota?) said it decided to open a plant in Ottawa instead of Alabama in part because of the higher education levels up in Ottawa (while having the Canadian government pay for healthcare also helped). Meanwhile, Alabama voters had not too long ago voted against tax increases for education because they were told such tax increases would make Alabama unattractive to investors. While taxes in Massachusetts and California may be high compared to down South, major investors are often international investors who can choose to invest anywhere in the world. High tax rates for Americans are still low when compared to Europe.

When you call yourself the Tax Foundation because you like low taxes and you end up proving that in the current American political context, low taxes really don't matter, then how does such an organization justify its existence? The majority of American states are in debt. Are they supposed to lower taxes even more?

Posted by Reality Man | October 14, 2007 2:56 AM

As far as I can tell Avram gets it right -- this study doesn't even try to measure results, it just measures things about the tax system. So all we can conclude from this is that the Tax Foundation doesn't like taxes. The talk of "competitiveness" looks like just eyewash, or to be more polite an a priori stipulation.

If I'm mistaken about the methodology I apologize, but the spreadsheet doesn't contain any data about results, so if they did some work on it they hid it pretty well.

Posted by Matt Weiner | October 14, 2007 8:47 AM

This is the spreadsheet I mean.

Posted by Matt Weiner | October 14, 2007 8:49 AM

Labor is a MUCH bigger cost factor for almost all businesses than are state and local taxation levels.

Posted by Peter | October 14, 2007 10:09 AM

Judging things about the tax system doesn't mean you "don't like taxes," as Matt Weiner above suggests. Tax policy experts on both the left and right widely agree on principles of good tax design.

For example, one criteria for a good retail sales tax is that (1) it doesn't tax business inputs, and (2) it has few exemptions so it raises enough revenue to cover program expenditures with the lowest statutory rate possible. It doesn't matter if it leads to higher or lower growth. It's about crafting tax law that's consistent with basic economic theory.

Those are the kinds of criteria the Tax Foundation's study uses to rank state tax systems. It absolutely doesn't mean they are "anti-tax" or "don't like taxes". It means they're judging which state tax laws are most consistent with widely-agreed-upon principles of good tax design, and which are not.

Whether that correlates with economic growth is a separate issue. Just because a poor tax system may not lead to empirically measurable bad consequences doesn't mean the question of good tax design is moot, as "Reality Man" seems to be saying.

For example, nearly all economists agree that the federal home mortgage interest deduction is bad tax policy. Why? Not because it leads to lower measurable growth -- after all, Canada doesn't have one and their not growing much faster as a result. It's because *it has no justification from an economists standpoint* and leads to unnecessary distortions in the housing market.

If we can't measure the impact on growth of bad tax policies, does that mean we can't say anything about them? That seems to be the extreme utilitarian view argued by "Reality Man" above. And frankly, that's just obviously wrong. Experts on both the left and right talk about good and bad tax policy all the time, with no regard to their effect on growth and job creation.

Posted by Kevin | October 14, 2007 12:13 PM

Here in Rochester, N.Y. we have a self made billionaire who complains that you can't start a business in N.Y.

Funny how he became a billionaire by starting a business in N.Y.

Posted by BushYouth | October 14, 2007 1:35 PM

Taxes aren't important. That's why Ireland is booming after raising corporate income taxes and why Sweden has such high corporate income taxes and is still successful.

Posted by Hans | October 14, 2007 1:50 PM

"Whether that correlates with economic growth is a separate issue. Just because a poor tax system may not lead to empirically measurable bad consequences doesn't mean the question of good tax design is moot, as "Reality Man" seems to be saying."

Umm, no, I'm not saying that good tax design is moot. In the abstract, it can be helpful. A recovering economy, such as the Democratic Republic of the Congo or Mozambique, can benefit from having a more well-designed tax system. Japan's tax system could be altered to increase the incentives toward consumption rather than savings, thus raising aggregate demand and helping out the economy. However, it's not like we have Scandanavian tax levels in rich blue states like Massachusetts and New York. By international standards among wealthy nations, high tax states in the US are rather low. Now, I'm guessing something called the Tax Foundation wants to have taxes lower than they are now. However, has having lower relative taxes in Wyoming than in Massachusetts hasn't led to an economic boom in Wyoming. Economics is too complicated to have a simple causality of "low taxes - ponies!" "high taxes = date rape!" What this study shows is that on balance in the American context, differences in state tax levels either A) don't matter in the end or B) higher taxes are good when combined with good governance (as opposed to low taxes and mediocre governance) with those taxes going towards superior education systems, etc.

Posted by Reality Man | October 14, 2007 2:38 PM

It means they're judging which state tax laws are most consistent with widely-agreed-upon principles of good tax design, and which are not. Whether that correlates with economic growth is a separate issue.

Then they shouldn't be talking about "competitive advantage," and Cato shouldn't be talking about "State Competitiveness."

Also, since the statement says "States without a given tax rank equally as number 1," it really looks as though they're expressing a dislike of taxes rather than (or in addition to) a judgment about how well the tax is designed. And it's utterly laughable for Cato to tout that the states that rank highest are the ones without state income taxes -- that's like saying that the people who rank highest on an index of height are the tallest ones.

Posted by Matt Weiner | October 14, 2007 5:25 PM