Regardless of your political leanings — Democrat or Republican, liberal or conservative — the Oct. 7 recall of Gov. Gray Davis was a significant occurrence. After years of seeming indifference, voters around the country are beginning to take notice of something that businesses have long known: that state and local governments play a significant role in establishing and maintaining the overall business climate.
After years of taking credit for the good economic times, politicians are beginning to be held accountable for the bad times. Is this fair? Probably not, but it does seem to be poetic justice that politicians are falling victim to their own hyperbole. After all, one recurring theme during the recall election was that whomever wound up as governor would have to be capable of running the equivalent of the fifth or sixth largest economy in the world.
Clearly, that’s a ridiculous notion — this isn’t the Soviet Union, after all. Still, politicians do have a major impact on the local business climate. Whether it’s through high taxes, right-to-work legislation, increasing the state minimum wage or mandating paid family leave, state legislatures play a significant role in establishing the economic climate in which local businesses operate.
Now in its ninth year, Expansion Management’s Legislative Quotient™ (LQ) attempts to measure the business climate established by the various state legislatures.
For the eighth time, Texas ranked No. 1. This year, the Lone Star State was followed by South Dakota, Nevada, Iowa and Washington. Rounding out the top 10 were Florida, Colorado, Missouri, Alaska and Tennessee.
Among the areas we consider in the LQ are how reliant a state is on certain business taxes; the overall impact of a state’s tax burden on workers; how much of a state’s budget goes to important infrastructure (i.e., highways) and education (i.e., future work force); how much of a state’s budget goes to simply paying the state’s government administration; whether a state is mortgaging the future (per capita debt), as well as the percentage of the current budget that goes toward servicing the existing debt; and, last but not least, whether the state has improved in the above areas during the past five years. The LQ also looks at legislation that tends to drive up business costs.
Where Do They Get Their Money?
Clearly, all governments require revenues to fund the many services (both good and bad) they provide theirconstituents, and they get that money through taxes and fees.
What’s important to you as a businessperson is what type of taxes they collect, and from whom. Does the state rely heavily on a corporate income tax? Personal income tax? Or maybe a sales tax, inventory tax or severance tax. It’s important to know the answers to these questions, and the significance will vary from business to business.
Not all taxes are equal when it comes to businesses. For some companies, the corporate income tax represents their main vulnerability. For others, like distribution centers, the corporate income tax may not mean much, but an inventory tax does.
Nevada, Washington and Wyoming have no corporate income tax. Two other states — Michigan and Texas — do not have a corporate income tax per se. Michigan imposes a single business tax of 1.9 percent on the sum of federal taxable income of the business, compensation paid to employees, dividends, interest, royalties paid and other items. Texas imposes a franchise tax of 4.5 percent of earned surplus.
How Bad is the Bite?
Generally, the larger the state, the more revenue it requires to provide essential services to its citizens. In order to measure the “pain level,” however, we looked at tax revenue per capita.
South Dakota, at $1,283, has the lowest level of tax revenue per capita, followed by Texas, Tennessee, South Carolina and Oregon. At the other end of the spectrum are Hawaii, at $2,748, followed by Delaware, Connecticut, Minnesota and Vermont.
The best way to measure the bite, though, is to look at the tax rate for the types of taxes your company is most likely to pay.
How Do They Spend Their Money?
The other side of the revenue equation is how they
spend the money. In reality, that’s what politics is all about and, depending upon your political persuasion, you almost certainly have strong view on the subject.
As a businessperson, however, two areas are more important than all the others: infrastructure (primarily highways) and education.
Education is the largest single expense for most states. It also directly effects the quality of work force you are likely to encounter. Many states will rave about their worker training programs, offering your prospective employees four to six weeks of specialized job training if your company locates there. However, those training courses pale in comparison to the 12 years of public education the state provides those same workers.
The other important area is the maintenance of the transportation infrastructure. We all know that, when it comes time to cut the budget, or to take from one area of the budget to give to another, politicians tend to put off maintenance on roads and bridges. It’s an easy target politically and, as they tell themselves, it’s only for one year.
Unfortunately, one year has a tendency to become two, then three, and so on, until, before you know it, your city’s or state’s bridges and roads are crumbling. Sooner or later, that deteriorating infrastructure will have to be repaired or replaced. When that happens, it’ll be a lot more expensive than if the state had just kept to a regular maintenance program.
More importantly, as a prospective business soon-to-be located in that state, your company will have to pay its share of the cost of long-deferred infrastructure improvements and repairs. Make sure that the state is keeping up.
How Do They Spend on Themselves?
This is an area where the actual dollars are less important than the message it conveys. Larger states like Georgia, Texas, Tennessee, Alabama and Michigan spend relatively little, per capita, on their legislatures.
Not surprisingly, small population states like Alaska, Delaware, Vermont and Hawaii spend the most per capita. It’s when you find a populous state like New York spending more per capita on its legislature than the states of Iowa or Wyoming that you begin to wonder.
It’s a small thing, sure, but worth a note.
Are They Mortgaging the Future?
Is the state government living within its means? If not, it
usually means one of two things will happen: taxes will go up or services will go down. Neither prospect is particularly good for your company.
All states, like most businesses, have some debt. What’s important is to look at how large the debt is, not in absolute terms, but rather in relative terms.
In the near term, what percentage of the budget goes toward paying interest on the state’s debt? Tennessee, Iowa, Arizona, Arkansas and Minnesota devote less that 1.4 percent of their budget to servicing their debt, while Massachusetts allocates 7.48 percent.
Look at the per capita debt burden, which allows you to equalize between the densely populated states and the more wide open states.
Tennessee, at $589, also has the lowest per capita debt, followed closely by Arizona, Texas, Kansas and Iowa. Alaska, at $7,109.43, has the highest per capita debt.
Look at the trends. Is the state continuing to live on credit, or is it paying off its debt? How bad is it? The states showing the biggest improvement during the past five years (in terms of the percentage of the budget devoted to debt service) are New Hampshire, Delaware, Louisiana, Vermont and Alaska. In fact, 31 of the 50 states have lowered the percentage of their annual budget that goes toward paying off past debts.
Although debt is a normal business expense, it has to be manageable, and well-managed. Remember, when you move into a state your business will assume a portion of that debt.
Are They improving?
OK, in politics, nobody’s perfect. Besides, what-
ever mess has been created can usually be blamed on the guys who ran the government before the current administration and legislature. At least, that’s where all the fingers will point.
But this is not about your personal politics, this is about your business, and about your fiduciary responsibility to that business and its investors.
Almost as important as the current situation are the trends. Are things getting better? Are business taxes going up or are they going down? Likewise for deficit spending. Look at taxes five years ago and compare them with today’s rates. Look at businesses’ share of the overall tax burden. Is the state shifting its revenue sources toward, or away from, the business community?
Other Areas to Watch Out Fo
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Under the current climate of budget shortfalls throughout the 50 states, much of the legislation that could end up adding to the cost of doing business in a state — things such as paid parental leave, mandatory employer-paid healthcare, etc. — has been held in abeyance, at least for the moment.
However, that will not last forever. As soon as the economy picks back up, revenues will begin to flow back into the various state coffers, and the pressure will mount. Eventually, some of those things will become law, at least in a few states. Whether that’s good or bad is a personal matter. The only thing for certain is that type of legislation will add to your cost of doing business in that particular state.
Is it worth it? You decide. After all, this is not a “one-size-fits-all” world.
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