Tax Burden “Rankings” Poor Measure of a State’s Economic Climate

May 19, 2011 by

“Tax cuts may be an effective political strategy and lowering business and investment taxes may appeal to corporate interests and attract campaign contributions, but they have little relation to state economies.”

That is the conclusion of a recent article entitled “Do State Business Taxes Really Matter” by Richard Florida, Senior Editor at The Atlantic.

Florida’s article examines “Competitiveness of State and Local Business Taxes on New Investment,” a recent study by Ernst & Young in collaboration with the Council on State Taxation. This study has received attention in the Maine media because it rated Maine as the state with the lowest combined state and local tax burden on new business investments, providing a huge contrast with, for example, Forbes magazine’s questionable ranking of Maine as 50th among the states for business climate. 

“These days talk about taxes of any kind, unless cuts are being proposed, is the third rail of American politics,” Florida writes. “Many business people and of course doctrinaire conservatives insist that lower tax rates create more incentives for investment, business formation and economic growth. Tax cuts, they continue, are thus a key mechanism for spurring economic growth. Though we haven’t seen much of the Laffer Curve since the heyday of Reaganism, a new generation of supply-siders is arguing for more tax cuts despite our already-staggering deficits.”

“The bottom line is this: Lower state investment tax burdens aren’t associated with stronger state economies, and higher investment tax burdens aren’t associated with worse ones.” Florida concludes.  “When it comes to building robust, resilient and prosperous economies, more fundamental factors than taxes–like human capital, entrepreneurship, and innovation–come into play.”

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