When Colorado voters decided earlier this month to approve a five-year hiatus to the state’s Taxpayer Bill of Rights (TABOR) law, it was just the latest in a nationwide series of political skirmishes over taxes and spending. TABOR, which was passed by Colorado voters in 1992 in an effort to reign in spending, restricts growth in state spending to the rate of population increase, plus inflation. Score one for the spenders.
Two years ago, the entire world sat spellbound by the spectacle of California voters recalling Gov. Gray Davis and replacing him with Arnold Schwarzenegger. Score one for the tax cutters.
Whatever your personal political leanings, there is no question that the issues underlying these political events are vitally important, particularly for business. State and local politicians are notorious for taking credit for economic good news, while at the same time disavowing any responsibility when the economy goes south. Their influence in both instances is usually grossly overstated.
Generally, there are two schools of thought on this matter. One holds that government can help the economy through targeted legislation that helps create a climate for success, while the other group holds that politicians best help the economy by just getting out of the way and not messing anything up. The truth is probably somewhere in between, although I suspect it’s closer to the latter than to the former.
| For companies evaluating locations for future business operations, how a state legislature “minds the store” is an extremely important site location factor. |
Nevertheless, for companies evaluating locations for future business operations, how the state legislature “minds the store” is an extremely important site location factor. That’s because the process is really just a comparison of various alternative locations in order to determine which would be most advantageous to the future health and success of that business.
For the 10th time in the past 11 years, Texas is ranked No.1 in Expansion Management’s annual Legislative Quotient™ ranking of state governments in terms of their positive impact on the state business climate. Nevada, Wyoming, Arkansas and Iowa follow the Lone Star State. Rounding out the top 10 are Arizona, Florida, Washington, Tennessee and Georgia (see the rankings on page 18).
A Look Behind the Numbers
| Lowest Tax Bite per Capita
1. Texas $1,367
2. South Dakota $1,376
3. Georgia $1,650
4. New Hampshire $1,543
5. Alabama $1,549
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In order to evaluate a legislature’s impact on the state’s general business climate, we looked at six major areas. While these are by no means the only ways in which a legislature affects the general business climate, together they present a pretty good picture of the impact, for better or worse, that state’s politicians have had.
General Tax Bite. Clearly, taxes have the most direct impact on business’ bottom lines, but just looking at tax rates is not enough to understand their total impact.
Nobody argues that states do not need revenues in order to provide essential common services, and that those revenues are almost always obtained through taxes. It’s not so much that businesses don’t like to pay any more in taxes than they absolutely have to because they are despicable cheapskates, but rather because higher taxes constitute one more expense that must then be offset by spending cuts in areas like employment, salaries, benefits, R&D, to name just a few.
| Highest Tax Bite per Capita
1. Hawaii $3,048
2. Wyoming $2,968
3. Connecticut $2,937
4. Minnesota $2,889
5. Delaware $2,862
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We also know that it is part of human nature to be more supportive of taxes that hit other people and companies harder than they do us. For that reason, it is also important to understand which specific types of taxes each state levies, and how much of its overall revenues come from that particular tax. In other words, it really doesn’t matter how high or low a particular tax is unless your company is vulnerable to that particular tax.
Among the factors we look at in this category to get a feel for the general tax bite are tax revenue per capita, as well as the percentage of total state tax revenues that comes from corporate and individual income taxes.
Debt Management. When a business decides to establish a facility in another state, it assumes that state’s debts as well, just as a business would if it were to acquire another company. This is important because, should that state eventually decide it must do something to reduce its debt load, it is most likely to try to do so by raising taxes. If your company now operates a facility in that state, guess who gets to help pay off that old debt?
| Lowest Total Debt per Capita
1. Tennessee $598
2. Texas $661
3. Kansas $907
4. Arizona $996
5. Georgia $1,025
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This category includes the state’s debt service ratio (percentage of state revenues that goes toward paying interest on the state’s debt), per capita debt service, total debt as a percentage of current total state revenues and the total debt per capita.
Transportation and Education Spending. Politics is all about allocating resources, and we all have our personal beliefs about how that money should be spent. In particular, we look at two areas in particular — education and highway spending — because they have an important impact on the work force and logistics infrastructure that companies with facilities in that state will need to rely upon.
This category includes the percent of the total budget spent on education and highways, as well as per capita spending on those two areas.
Five-Year Trends on Taxes and Spending. One of the great things about life is that we always have a chance to do better, and the same is true for governments. The only problem is that it almost always takes a number of years to turn around a state with an “unfriendly” business climate.
| Highest Total Debt per Capita
1. Alaska $8,997
2. Massachusetts $7,551
3. Connecticut $6,450
4. Rhode Island $5,752
5. Delaware $5,328
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From a purely financial standpoint, 10 years is probably a better measuring stick but, given the transient nature of politics, we chose to measure change over a five-year period.
This category includes the trend during the past five years in terms of the degree of reliance on corporate and individual income taxes, tax bite per capita, improvement in the state’s debt service ratio (percentage of state revenues that goes toward paying interest on the state’s debt), total debt per capita and spending on government administration.
Spending on Government Administration. In an attempt to measure the “grocery bill” of state government, we looked at how much each state spends on itself, both as a percentage of the total budget and in per capita terms.
Right-to-Work Laws. This category includes whether a state has right-to-work (RTW) legislation in effect. Having RTW laws in effect does not mean that there are no unions in the state; all it means is that membership in a union cannot be a precondition for employment.
| Lowest Debt Service Ratio
1. Tennessee 0.89%
2. Iowa 0.94%
3. Arkansas 0.95%
4. Arizona 0.98%
5. Kansas 1.18%
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While one can argue whether this is a good thing or a bad thing, I can say in all honesty that the vast majority of business executives I have interviewed during the past decade consider RTW an important discriminator when choosing between two states for a future manufacturing facility.
Information for this category is taken from the National Right to Work Foundation’s Web site at www.nrtw.org.
Twenty-two states have passed RTW legislation, with Oklahoma being the most recent state to do so (see page 20).
What Does it all Mean?
Unfortunately, when it comes to the subject of business and taxes, the discussion almost always turns both philosophical and emotional. However entertaining, though, doing so misses the point.
Let’s be clear about one thing: taxes are really just another business expense. Whether the tax money goes to pay for vitally important services is really not the issue. The fact remains that whatever a company pays in state and local taxes must either be offset by cuts in other expense areas or it comes at the expense of profits.
| Highest Debt Service Ratio
1. Massachusetts 7.6%
2. Connecticut 6.0%
3. New Hampshire 5.9%
4. Delaware 5.2%
5. Hawaii 4.6%
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And just as wages, real estate or living costs vary from place to place, so, too, do taxes. Not only that but, if a company is particularly cost-sensitive, it can become a very important factor that can easily eliminate an otherwise satisfactory location from consideration for a future facility.
Ironically, that’s why incentives can be so important at times: They can help offset other costs that might otherwise cause a particular location to not be selected.
In a way, it becomes a vicious circle, with states whose taxes are probably too high offering various types of tax abatement and credits in order to offset high costs driven, in part, by high taxes.
So, are taxes the most important site selection factor for companies when choosing a future facility location? Of course not. In fact, in the overall scheme of things, taxes probably rank somewhere between No. 3 and 10, depending upon whom you ask.
The point is not that businesses make location decisions based primarily on tax considerations. Rather, the point is that taxes constitute just one more expense to a company that, in all likelihood, is trying to reduce its expenses.
It’s really no more complicated than that.
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