Taxes drive business out of state, deter new businesses from moving to Minnesota and prevent new businesses from starting here. Oh, and they also drive away rich people who pay income taxes.
We hear this sort of conservative tax critique based on anecdotal "evidence" that businesses are leaving the state. A factual response to this canard can rapidly get too wonky for most voters. That's why the anti-tax crowd can get away with it. The best response to these claims is, "Oh yeah? Prove it."
Here are some of the reasons you should be very, very skeptical about such claims.
Business relocation is a poor measure of state business climate. A study on job loss resulting from California businesses fleeing the state found "the shift of employment of California-headquartered companies to other states has been offset by increased employment in the state by firms headquartered elsewhere, with the result that California’s share of national employment has remained roughly constant."
It found that physical business relocation contributed trivially to changes in employment numbers or lost earnings, and that business relocation in the state did not change much over the past decade or so. On the other hand, decisions to expand or start a business may be more strongly influenced by marginal state-to-state differences that affect profitability.
Relocation is a less likely response to increased taxes. A Texas study looked at the business climate for the state's technology industries. The study noted distinct differences in the ways companies responded to a theoretical major tax increase of 50 percent or more.
In general companies would respond to a major increase in this sequence:
- Raise prices
- Decrease other costs and decrease employment
- Move some property out of Texas
- Move entirely out of Texas
However, small technology companies were more likely to raise prices and less likely to move property or decrease employment than larger companies. Larger companies, especially those competing internationally, were more likely to decrease employment than raise prices.
Taxes are only one factor in decisions about location. Taxes are only one factor is a business's decision to start, expand, relocate or fold. Since moves are expensive and political and economic changes can always lead to shifts in tax policy, the benefits of lower business taxes in another state can be erased relatively easily. Lower state taxes are typically accompanied by lower state expenditures for education, infrastructure and highways, and public health. These matter at least as much in determining an area's economic health and suitability for business growth.
The Loyalty Effect. The Texas report found that "firms started in Texas are less sensitive to variations in taxation" and a "clear majority of technology firms did not choose the state because it represented the best tax option and for these companies economic factors diminish in relation to state loyalty." This loyalty effect could be related to family roots of the founders, but also to a more nuanced appreciation for cultural and quality of life considerations.
Cost, skills and availability of labor. The education system and openness to immigration (both from other states and nations) should have a positive effect on business location. So, conservatives would say, do lower labor costs, right to work laws and lower workers comp rates.
The Clustering Effect. States that have a solid infrastructure, educated workforce, access to university research and a history of business innovation are more likely to attract similar businesses. Businesses look for suppliers, customers, and peer companies that can be source of ideas, support and potential talent. States can try to attract such businesses by lowering taxes and regulation or declaring their ambition to become the Silicon Valley of Switchgrass, but in fact this type of transformation is very difficult to achieve without substantial investment — and an already established base of businesses in a related field.
For evidence, look at how the so-called pro-business states actually rank as locations for major business headquarters. Those with supposedly attractive business climates are not exactly powerhouses. You might argue many of the "top" 12 have dressed themselves up with gimmicks and incentives to attract businesses, because fundamentally they have severe deficits.
- Virginia —30
- South Carolina —4
- Florida —31
- North Carolina —25
- Utah —5
- Wyoming —0
- South Dakota —0
- Alabama —8
- Georgia —31
- Nebraska —8
- Idaho —3
- Nevada —8
Minnesota, which ranked 39th, has 36 Fortune 1000 headquarters — more than any state in the top 20. The author of the previous year's Pollina survey also remarked in his report: "Today, if a job is relocated out of a state, it is more likely to be moved offshore than to another state."
This post was excerpted from a post at Across the Great Divide.