Low Tax States Don’t Equal High Job States

June 27th, 2011 at 7:14 pm | 31 Comments |

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The Department of Labor has released its state-by-state labor numbers: joblessness had declined in 24 states, risen in 13 (and Washington DC) and remained largely unchanged in 13 compared to last month’s figures.

While good news that a number of states are improving, there is also much to take from those that are continuing to struggle. The disparity also provides an opportunity for those who believe in the central tenet of federalism – that states are laboratories of experiment to see what works and what doesn’t.

As one explores the common threads among improving states, current Republican rhetoric, with its particularly heavy emphasis on tax policy, may cloud the issue. The numbers suggest a much larger, more complex story.

A fundamental problem comes with trying to directly relate unemployment to tax policy alone.

For example, Nevada, leading the nation in unemployment, has the fourth best tax environment, according to the Tax Foundation. Of the states without an income tax (nine in total), six have lower unemployment than the national average (Alaska, New Hampshire, South Dakota, Texas, Wyoming), two are roughly keeping the national average (Tennessee and Washington) and two are above (Florida and Nevada). Of the seven states with a flat income tax, three are at the national average, three are below, and one (Michigan) is above.

Texas, which has produced 37 percent of all American jobs since the economy, is, according to CNBC’s 2010 numbers, the 30th most expensive state to do business, but still the best. The Wall Street Journal emphasizes the thorough nature of Texas’ appeal: “Capital—both human and investment—is highly mobile, and it migrates all the time to the places where the opportunities are larger and the burdens are lower. Texas has no state income tax. Its regulatory conditions are contained and flexible. It is fiscally responsible and government is small. Its right-to-work law doesn’t impose unions on businesses or employees.”

California, still plagued by double-digit unemployment, is a clear example for how this works the other way around. Despite, according to CNBC, being first in the nation in “Technology and Innovation” and “Access to Capital” it ranks 32nd in overall competitiveness. Rhode Island, ranked 49th overall due to high business costs (45th), poor transportation (48th) and hostility towards business (48th), is another case of poor state management. Overall, lack of competitiveness has culminated in an unemployment rate 1.8 percent above the national average.

This is not to say that tax policy is not an incredibly important variable. South Dakota, Wyoming, Montana and New Hampshire (ranked first, third, sixth and seventh1respectively by the Tax Foundation) all are below the national average. But, it’s imperative to emphasize the multitude of factors contributing to prosperity.

A pro-growth tax policy is a necessary but not sufficient element of success. Important aspects, like infrastructure, quality/education of workforce, quality of life, are as necessary to a well-functioning state. However, this common sense is often marginalized in current GOP rhetoric.

If Republicans continue to portray tax-cuts as “magic bullets”, the greater debate will be lost and the above issues will fall into the hands of the left’s public-based solutions. Republicans must cast aside the intellectual crutch of “cut taxes, cut regulation” if they hope to display the breadth of economic understanding necessary to win an election.

These economic realities provide good and bad news for the Republican Party. The good news is that the famous Coolidge expression, “What is good for business, is good for America,” holds true. The bad news is that what is good for business is much further reaching than the answers provided by the GOP so far.


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31 Comments so far ↓

  • dmnolan

    If we think of tax cuts as bribes, we see a clearer picture emerge. Using the federal treasury to buy and secure the alliance of wealthy individuals and groups to amass and maintain political power. All this talk of fiscal piety and the evils of “big government” is duplicitous swill.

  • seeker656

    Information like this doesn’t make into the 24/7 news outlets because it can’t be stated in sound bites.

    It’s much easier to talk of abstract tax cuts and spending cuts and to repeat that mantra for years without being questioned or challenged by the media until it becomes essentially meaningless without any substantiating evidence.

  • COProgressive

    “Texas, which has produced 37 percent of all American jobs since the economy, is, according to CNBC’s 2010 numbers, the 30th most expensive state to do business, but still the best.”

    Huh? Your editor take the day off? Since the economy what? Was tanked by the Bush maladministration? Was taken to the cleaners by the greed of American Capitalism? Was handed over to the oligarchs?

    Tax cut don’t stimulate the economy, good wages do. When people have money to spend due to good wages, they spend. When tax cuts are given to the wealthy, this is the result…….

    We are being systematically robbed by the wealthy oligarchs with the help of the Republicans (The Party of Business) in OUR government. We are on that slippery slope to Oligarchy.

  • advocatusdiaboli

    The Bush Tax cuts preceded the recession, stayed in place during, it, and are still in place as we struggle to get out of it. If that doesn’t prove beyond any doubt that they have no impact on joblessness or employment, nothing will.

  • He Loved Big Brother

    Thanks for the insightful and illuminating article. Here are some suggestions for additional headlines

    1: Sun rises in the east

    2: Gravity tends to pull things downwards

    3: Oxygen essential for life

    Maybe you can think of a few other revelations for your readers…….

  • TJ Parker

    Yes, yes they are.

  • kevin47

    I agree with everything here. South Dakota has not only low taxes, but also a lax regulatory environment. Hence, it is taking jobs from other states (and will continue to do so).

    The ratio of comments to people who read the post will be quite low, I predict.

  • llbroo49

    I have a theory about tax rates and capital formation. As long as taxes are relatively high (and assuming tax enforcement remains strong) companies have an incentive to invest in growth and infrastructure to avoid paying taxes. This would mean more charitable contributions or building new facilities as businesses would see better value in investing in their business versus merely writing a check to the government.

    An example of this is the fact that many Americans continue to buy homes because of the tax write off. But have you ever heard a real estate agent as part of their selling technique explain how much you are saving due to buying versus renting?

    In essence tax avoidance ( not to be confused with tax evasion) will lead to higher employment than lower taxes.

  • llbroo49

    One other thing. Raise the tax rates on capital gains on individuals or companies that dont make a majority of their income in wages etc. As long as taxes are low and capital gains are lower, it is in a companies best interest to take their profits and invest them in to the stock market instead of infrastructure ( which leads to increased employment).

  • nuser

    “and the evils of big government is duplicitous swill ”
    And so it is !
    Never ,ever, in in all this time did anyone hear a Republican explain their interpretation of” small government”. They insist on telling you who to marry , when to have a child , how to educate said child, keep your gun loaded, and if you are raped , get your own goddamned rape kit. The list is quite long , if you please. Of course there is the question of withholding care and comfort for the elderly, and the matter of pensions for Baby Boomers. Small government, say you? Sounds to me like Big Brother watching.

  • kevin47

    As long as taxes are relatively high (and assuming tax enforcement remains strong) companies have an incentive to invest in growth and infrastructure to avoid paying taxes.

    Except business only make money when there are profits, which are taxed. Are you serious?

    An example of this is the fact that many Americans continue to buy homes because of the tax write off.

    Americans aren’t buying homes. The home market has plummeted. That’s why we’re in this mess.

    [q]
    In essence tax avoidance ( not to be confused with tax evasion) will lead to higher employment than lower taxes.[/q]

    Tax avoidance is lower taxes, the method of lowering taxes favors those who have the means to exploit it. That’s the whole thing about picking winners and losers. The winners tend to win, and the losers tend to lose.

    Your theory is not a theory. It is a hypothesis that has been emphatically debunked.

    • sparse

      “Your theory is not a theory. It is a hypothesis that has been emphatically debunked.”

      or…not. i think you emphatically misunderstood.

      imagine a small business owner who has gross sales of $95,000. of that, $30,000 goes to fixed costs like rent and insurance. he pays his employee another $30,000 and himself takes home the remaining $35,000 (which is his profit). pretty modest, but it pays all his needs, and he is building a nest egg.

      the following year, he has gross sales of $100k. everything else is the same. he has $5000 to do something with, but what? in most cases he faces a choice between paying himself the extra money and reinvesting it in the business. if he pays himself, being the entrepreneurial type, he will probably invest the money. so either way, it gets invested. but where?

      in a low tax situation, if he pays himself, he has to pay $500 to the feds (bummer). but that’s still a pretty good chunk of change, and there are some really hot investment opportunities his stockbroker was telling him about. something about “emerging markets.” the high average yield will more than make up for the tax hit.

      in a high tax situation, if he pays himself, he knows that 2,000 dollars will pretty much evaporate. by comparison, buying that new widget-maker would allow him to keep control of all the money, as it would become a business expense and could be written off under section 179. and on top of that, he can look forward to an enhanced bottom line next year.

      you can scale it up, and go from a sole proprietorship to a corporate structure, but the kernel of the logic remains the same.

      also, the real estate market has slowed down, not stopped. people, many of them, are still buying houses.

      yeah, i think you need to re-read those two posts. not sure you got them at all.

  • kevin47

    “Never ,ever, in in all this time did anyone hear a Republican explain their interpretation of” small government”. They insist on telling you who to marry ,”

    Small or big government, you are told who you can marry. I think government marriage should end, however, as do many conservatives.

    “when to have a child ,”

    Nope. You can have a child when you please. However, if you have sex, and become pregnant, there is another human being involved who has the right to be protected. The government ought not tell that child that it cannot live.

    “how to educate said child,”

    It is liberals who oppose school choice

    “keep your gun loaded,”

    you are free to do so, without government interference

    “and if you are raped , get your own goddamned rape kit.”

    Congratulations on swallowing an inaccurate talking point.

    “The list is quite long , if you please.”

    By all means, continue.

    “Of course there is the question of withholding care and comfort for the elderly,”

    As European nations do, but we don’t.

    “and the matter of pensions for Baby Boomers.”

    Well, yes, we oppose those. How is it big government to oppose government payout?

    “Small government, say you? Sounds to me like Big Brother watching.”

    Thanks for the incoherence.

  • Rabiner

    The only real issue I have is when you compare Texas and California. Texas has nearly as large a budget deficit as California so it is not fiscally responsible in the least way. Its population is uneducated when compared to other parts of the country and has benefited not from people living in Texas taking jobs but rather people immigrating to Texas from other parts of the country to take the new jobs being created.

    • PracticalGirl

      Good point about the “migrant workforce” that takes Texas jobs. Texas schools are some of the worst performing in the nation and don’t churn out the educated work force necessary for these jobs.

      As one who is sticking my toe in the Texas water for possible long term relocation, I have very mixed reactions. I came from a 6% flat state income tax, which seems like a lot until I consider that, in Texas, EVERYTHING else is taxed. Sales tax on food, clothing, major purchases like real estate and cars. Want to register a car in Texas? First pay something called a “new resident tax”. Real estate taxes, at least in the cities, are extremely high, and still the schools are some of the worst in the nation. Business “fees” are charged at a clip that makes my head swim.

      It doesn’t surprise me that a conservative rag like the WSJ doesn’t point this out, but “small government” to describe Texas? Hilarious. The state and local government here has its hand in your pocket at every turn.

      • KRH67

        Practical,

        Yes, I’m bitter, but if you think thats a problem try moving to Chicago. 5% flat income tax plus 10% sales tax on everything you buy! Hooray!

        And thats not counting the endless other little taxes you’re going to incur during everyday life. Its just a mess.

        • PracticalGirl

          My sympathies, of course.

          I do think that it’s important to look at true costs before labeling a state “low taxes”. Texas enjoys that reputation and yet (when it comes to actual money out of pocket) it isn’t necessarily true for the residents.

          Meanwhile, the GOP controlled State legislature got into a pissing match with Amazon who has offered to expand their business operations center in TX, create 5,000-6,000 new jobs and invest 300 million dollars into the TX economy. All TX has to do is give Amazon a 4 1/2 year amnesty on collecting sales tax on Texas residents. Not only has the state declined, they have decided to go after Amazon for back sales taxes on TX sales. Their argument is that, since Amazon has a TX presence (a small facility in Irving), it needs to pony up. Mind you- these are taxes that Texas has never gotten before. Amazon’s solution? Close the Irving facility- Texas presence gone, no sales tax for their TX customers.

          113 jobs will be lost if they do it, 6,000 jobs will not come to Texas-jobs that require training but not high education and therefore could actually go to Texans- and no further investment in the state by Amazon. I scratch my head on this one for a couple of reasons:

          1- Texas has a strong history of courting industry based on temporary tax concessions
          2- Aren’t “tax incentives” based on jobs creation and community investment the Holy Grail of conservative economics of the moment?

        • KRH67

          Interesting, I hadn’t heard about that. Have they actually closed, or are they in the staredown part of the show?

          That tale sounds familiar to me, when Illinois raised its taxes last year Jimmy Johns/Caterpillar threatened noisily to flee the state. They haven’t yet, but I think its only a matter of time until either they do or the legislature cracks and gives them concessions. We just can’t afford them actually leaving.

          Where I feel the Texas “low taxes” mantra is actually justifiable is that relatively it probably holds true. Sure, they have taxes in every nook and cranny but you cannot find a state that doesnt.

          In the land of the blind, the one-eyed man is king.

  • politicalfan

    Worth the read, http://www.latimes.com/news/opinion/commentary/la-oe-lofgren-budget-republicans-20110626,0,7490630.story
    (OP-ED: Mike Lofgren, June 26, 2011. LA Times).

    “The GOP insists that those wealthy people use their money to create jobs, and that taxing them more heavily would ultimately hurt the economy. But, if that’s so, why was the rate of job creation in the decade after the Bush tax cuts the poorest in any decade since before World War II?”

    Tax reform would be nice but we would also need a Congress and Senate that are willing to solve things in a bipartisan fashion. We can still dream.

    Bowles-Simpson’s proposal of increased taxes should be on the table if we are serious about addressing debt. If someone wants to convince people they are seriously a fiscal conservative, they would be willing to put everything else on the table.
    http://economics21.org/commentary/winners-and-losers-under-simpson-bowles-social-security-plan

  • greg_barton

    “Texas has no state income tax. Its regulatory conditions are contained and flexible. It is fiscally responsible and government is small.”

    How can a $27 billion budget deficit be considered fiscally responsible?

    • KRH67

      Greg,

      How can a $27 billion budget deficit be considered fiscally responsible?

      By comparing it to Illinois, which has much higher taxes but manages to be worse off fiscally.

      Turns out tax cuts aren’t a magic bullet, but then again neither are tax increases. Who would have thought economic issues would have any complexity? Certainly not our politicians!

  • Stewardship

    With the exception of New Hampshire, the list of best states are largely states with strong natural resource extraction industries. With the exception of Texas, the other states are among the lowest in population–which translates into far less demand for government services and welfare.

    A major “apples to apples’ fact is the right to work status of those states vs. others. I work in economic development in Michigan, and see first hand the jobs that land in other states primarily due to Michigan’s reputation as a haven for unions.

  • llbroo49

    Kevin47,

    Perhaps I did not articulate my position clear enough. I used to work as a examiner with the IRS. When Taxes are higher and tax enforcement is supported, there is a tendency to make finacial decisions that will maximize tax deductions. The logic is based on the fact that company X is going to have Y tax liability UNLESS company X does Z with it’s profits. This is the basis of capital formation. Tax policy is meant to encourage the private sector and individuals to participate on economic activity that the government thinks is best for society.

    This is also why it is conceivable that tax revenues will decrease in periods of high taxes. This is because the private sector, in it’s efforts to avoid taxes, will take on tasks that otherwise the government would have to do.

    An example would be if a parent told a teenager they could either pay half of their allowance torward rent OR save half in a bank account. Assuming the parent wants the child to be able leave home with savings. However, if you tell the same teenager they only have to pay 10% of their allowance in rent OR save half in the bank- most people will find that it is cheaper to pay the new lower rent cost and be able to have access to more funds to attend parties and hangout with friends.

  • SpartacusIsNotDead

    test

  • JimBob

    Best Worst States for Business

    http://chiefexecutive.net/best-worst-states-for-business

    All right to work states.

  • LauraNo

    Jim Bob, did it occur to you that it might be assumed that unions are not business’ favorite thing? Of course any survey of CEOs will rank non-union states as worst for business. It doesn’t even pay to read the thing.

  • kevin47

    “I used to work as a examiner with the IRS. When Taxes are higher and tax enforcement is supported, there is a tendency to make finacial decisions that will maximize tax deductions. ”

    Correct, but that is a means to the end of having increasing profits. Taxes cut against profits. If the taxes undercut profits substantially, businesses will stop investing, for the reason that investment is a risk. If you lose money, a tax deduction doesn’t help you.

    Your theory has been rejected by the evidence, which is why even socialist-leaning countries endeavor to cut the corporate tax rate in order to entice businesses.

    • llbroo49

      Companies will invest during periods of high taxes to AVOID simply losing said funds to the government in the form of taxes. It is the equivalent of me telling you to either give me $800.00 of your discretionary cash OR buy a tv. Since you are going to lose the money anyway, you are inclined to buy the tv which can at least entertain you versus merely forfeiting the money. Obviously, you may prefer to do something entirely different with the money, but when given those two choices what will you choose?