WILLisms.com: Trivia Tidbit Of The Day: Part 457 -- Business Climate.

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Trivia Tidbit Of The Day: Part 457 -- Business Climate.

Policies Matter-

The Tax Foundation this month released its new State Business Tax Climate Index, which has Wyoming in the number one slot and Rhode Island in last place.

Looking over the list, you see some typical patterns. Red states are more business-friendly (at least, in the tax code) than blue states. The West and South are more business-friendly than the Midwest and Northeast (again, in the tax code, at least).

But here at WILLisms.com, we like to find deeper patterns to these sorts of numbers. Politically speaking, Americans tend to care about jobs more than how well businesses are treated by the government, although the two are obviously intrinsically linked. So, how about comparing the business climate and the unemployment rate. State-by-state, there are some definite patterns, of course. Michigan, for example, has a mediocre business climate and is currently experiencing a one-state recession, complete with job losses. Ohio may be a red state, but it has an embarrassingly poor business climate and thus has an unemployment rate more than a full point higher than the national average. Delaware, a blue state, is among the best ten states for business climate, and its unemployment rate is a mere 3.0%. Meanwhile, first place Wyoming and second place South Dakota both have unemployment rates of 3.1%.

Policies clearly matter. No state will ever tax its way to prosperity, short-term or long-term.

Crunching the numbers, there are definitely more patterns in the numbers, based on the latest BLS employment data (.pdf). For example, if you go region by region, you'll find:

The modified rank in the column on the right is more helpful than the straight average business climate rank, because it accounts for population. Texas or California, for example, carry more weight than Wyoming or Rhode Island.

With a few exceptions, there are some striking correlations between lower business tax climates and lower unemployment rates.

Within the Northeast, New England has a better business tax climate than the Middle Atlantic, and wouldn't you know-- it also has a lower unemployment rate.

Within the West, the Pacific subregion has a much higher business tax burden than the Mountain subregion. Consequently, there is a difference of nearly 2 percentage points between the two subregional unemployment rates. It's hardly an accident that the Mountain subregion has both the best average ranking and the best unemployment rate in the country.

Within the South, the subregion with the worst business tax climate, the East South Central subregion (Alabama, Kentucky, Mississippi, and Tennessee) also has the highest unemployment rate. However, in fairness, it should be noted that Hurricane Katrina does continue to have an impact on Mississippi's economy. Indeed, if you take Louisiana out of the West South Central subregion, the numbers most definitely fit better within the overall pattern: strong business tax climate --> low unemployment.

The Midwest is its own beast, but it could clearly benefit from a little tax competition.

All of this being said, business tax climate is just one factor among many that impacts the unemployment rate. Sure, it's a big factor, but there are all kinds of other variables that counteract or amplify these effects. The bottom line, however, is that lower taxes generally lead to better economic outcomes, including more jobs. Republicans seeking the White House in 2008 ought to explain this correlation better, because it is a winning political point. Good policy is good politics, but only if Republicans are willing to stand up and proactively make their case.

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Previous Trivia Tidbit: Strong Economies Boost The Environment.

For reference, below are the states that comprise the various subregions (and these are all based on BLS classifications).

NORTHEAST-

New England: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont

Middle Atlantic: New Jersey, New York, and Pennsylvania

SOUTH-

South Atlantic: Delaware, District of Columbia, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia, and West Virginia

East South Central: Alabama, Kentucky, Mississippi, and Tennessee

West South Central: Arkansas, Louisiana, Oklahoma, and Texas

MIDWEST-

East North Central: Illinois, Indiana, Michigan, Ohio, and Wisconsin

West North Central: Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota

WEST-

Mountain: Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah, and Wyoming

Pacific: Alaska, California, Hawaii, Oregon, and Washington.

Posted by Will Franklin · 23 October 2007 02:18 PM

Comments

This post was interesting to me partly because I just finished writing a local article investigating whether or not goverment policies/programs make a difference in business startups, etc. I know here in North Dakota there are some tax benefits for startup companies. It was wonderful to see the impact of the tax policies documented. Thanks for a great post.

Posted by: Dakota Lifestyle: Beyond the Weather at October 24, 2007 06:25 AM

I think you meant, "Ohio may be a red state, but it has an embarrassingly poor business climate and thus has an UNemployment rate more than a full point higher than the national average."

Posted by: JohnJ at October 24, 2007 09:00 AM

You're right. I think I spelled it "umemployment" ( I kept typing an 'm' instead of 'n' for some reason) and it auto-corrected it to just employment.

Posted by: Will Franklin at October 24, 2007 09:54 AM

We see it even on a smaller scale in the suburbs.

Say for instance that Walmart wants to build a supercenter somewhere near the border of Town XXX and Town YYY. Those two towns begin competing for the business. First, a Walmart Supercenter produces around 1000 jobs directly or indirectly. It produces huge amounts of sales tax.

What we see is some cities want the jobs and the revenue and are willing to fund substantial infrastructure improvements to be repaid to the Walmart through property and sales tax revenue. Basically, we will pay you to put in our civic improvements to support your business. The Walmart acts as an anchor and attracts lots of smaller shops, etc. Usually, these areas that are willing to compete for the jobs also have lower sales tax rates.

We see it on a municipality by municipality basis where some cities have business friendly climates and want to attract businesses and build their city and infrastructure. Other neighboring cities don't want to cut anyone any breaks and have higher sales taxes. So businesses like Car Dealerships where sales tax differences can mean hundreds of dollars on a new car as well as new retailers go to the other cities. And over time, the lost revenue in the less business friendly cities leads to a lower quality of life there and folks move to lower property tax cities with more amenities. And it doesn't require higher taxes and taxpayer funded works projects, but rather, you lower taxes and the businesses come and build for themselves.

Posted by: Justin B. at October 24, 2007 04:59 PM