Taxes matter

December 10, 2007

Do taxes matter when it comes to where Americans choose to live and work? According to two new studies the answer is an emphatic yes!

The American Legislative Exchange Council released a study last week authored by noted economists Arthur Laffer and Stephen Moore. The two economists wrote about the findings of their study, Rich States, Poor States in today's Wall Street Journal:

Over the past decade, the 10 states with the highest taxes and spending, and the most intrusive regulations, have half the population and job growth, and one-third slower growth in incomes, than the 10 most economically free states. In 2006 alone 1,500 people each day moved to the states with the highest economic competitiveness from the states with the lowest competitiveness.

Of all the policy variables we examined, two stand out as perhaps the most important in attracting jobs and capital. The first is the income tax rate. States with the highest income tax rates -- California and New York, for example -- are significantly outperformed by the nine states with no income tax, such as Texas and Florida. As a study from the Atlanta Federal Reserve Board put it: "Relative marginal tax rates have a statistically significant negative relationship with relative state growth."

The other factor for attracting jobs and capital is right-to-work laws. States that permit workers to be compelled to join unions have much lower rates of employment growth than states that don't. Many companies say they will not even consider locating a factory in a state that does not have a right-to-work law.

How did Washington fare on the study's economic competitiveness index? The state ranked in the bottom half of the nation coming in at 31, with poor scores for sales tax burden (49), tax burden other than sales and income taxes (44), recent tax increases (40), debt service as % of revenue (43) and state minimum wage (50).

Another study released today by the Washington Research Council finds that tax burdens dictate where employers locate:

Taxes matter when businesses decide where to locate. This is particularly true for decisions about where to locate within a metro area, where the competing locations all have access to the same pool of labor (Mark,McGuire and Papke 2000; Wasylenko 1997).

Seattle faces strong competition from nearby suburban cities for jobs. In recent years, the majority of jobs created in King County have landed outside of the city. Recent success in redeveloping the city as a place to live and consume should not blind policy makers to the fundamental importance of enhancing the city’s attractiveness as a place to work.

Business taxes are higher in Seattle than in the suburban cities east of Lake Washington. These cities are growing jobs faster than Seattle. As we’ve said: Taxes matter.

They sure do. Just ask Michigan Governor Jennifer Granholm how much they matter:

Gov. Jennifer Granholm, stung by outrage from the business community over a now-repealed tax on services and some discontent with a state income tax increase, says she won't resort to tax increases to cover any future shortfalls.

"The most important thing I learned is I'm not ever going to raise taxes again. It's too hard. It's too impossible," Granholm said.

"Especially in light of our economy and what we've been through, I just don't think that there's anybody who's interested in proceeding down that path again. And I'm first at the head of that line," she added.