It has become trendy of late for think tanks to publish a ranking system that measures the relative tax burden each of the 50 states places on businesses. The Tax Foundation, a conservative think tank that focuses on tax relief, recently released one such survey ranking state “business climates” for mature companies and new businesses. In this survey we are told Arkansas ranks in the bottom half (#30) for “mature firms” but makes the top ten for “new firms,” ranking 8th overall.
The Tax Foundation partnered with worldwide accounting and consulting firm KPMG to evaluate all 50 states’ tax codes as they relate to business and economic development. We have seen these studies produced routinely in the past several years, all of them using different methodologies in an attempt to measure the tax burden born by corporations in each state.
All of these studies have some level of merit, but none of them should be viewed as a legislator’s guide to corporate tax policy and economic development. The truth is that the studies are only as good as the assumptions on which they’re based. Most begin with the assumption that the lower the tax rate, the better for business. Among other things often missed by these surveys is an accounting for the unique credits, deductions, and exemptions states often afford to businesses. Studies tend to rely solely on the highest corporate income tax rate regardless of other factors.
Peter Fisher, professor emeritus for urban & regional planning at the University of Iowa, recently completed a study of these rankings systems and concluded that none can be viewed as the sole arbiter of ranking a state’s business climate. Dr. Fisher notes that tax cuts for businesses mean cuts in services, something tax cut proponents routinely fail to mention.
“State must balance their budgets. Since tax breaks are costly, these costs must be offset, either by increased revenues elsewhere or by cuts in state services. Cuts in state services can increase business costs and negatively affect state growth in a variety of ways.”
By limiting the amount of tax revenue corporations provide for states, governments are forced to either raise taxes on citizens – people who live in the states, not shareholders living worldwide – or cut back on services. This means less funding for education and child care, roads and highways, and adequate health coverage and availability – all the things corporations look for when deciding to whether to invest or expand.
The most important thing noted in Dr. Fisher’s study is that any attempt to measure a state’s business climate that fails to evaluate schools, roads, and health care misses the mark. The studies like the one from The Tax Foundation should be viewed for what they are: a measure of taxes that tells only part of the story, often a story with an agenda. Responsible government asks its citizens to invest in their future, and corporate entities should be asked to maintain the same responsibilities as the workers they employ.