Tax Foundation Report is a Poor Guide for Tax Policy

Each year, the right-leaning Tax Foundation stirs up a slew of short-lived publicity by giving Georgia a mediocre ranking in its annual “business tax climate” report. But these rankings are meaningless as a measure of whether Georgia is a good place to do business, and they offer a faulty roadmap for how state policymakers should deal with taxes. Here are a few brief reasons why:

  • The business tax climate index doesn’t measure how much businesses in each state actually pay. As the Tax Foundation itself clearly states, “The [index] does not measure business tax burdens.” If it did, the authors would have found the same thing that any objective analysis would tell us: that Georgia is a low-tax, business-friendly state. Businesses in Georgia pay less in state and local taxes as a share of the state’s economy than in almost any other state, according to the most recent data available.

 

Source: Council on State Taxation

 

  • The report’s flawed methodology has been widely panned by nonpartisan experts and academics. Rather than measuring how much Georgia businesses actually pay, the Tax Foundation employs a head-scratching formula of 118 tax variables that one economist describes as a “mishmash of stuff the Tax Foundation doesn’t like.” Some of the variables are important to sound tax policy, while others are not. For example, the Foundation’s criteria severely penalize states for having a personal income tax, despite the fact income taxes make up a relatively small share of what in-state businesses really pay. Only 6 percent of all state and local taxes paid by Georgia businesses in 2012 were personal income taxes, compared to 41 percent for property taxes and 29 percent for sales taxes.
  • The rankings are completely unrelated to the strength of a state’s economy. The reality is that states dubbed as having friendly business tax climates don’t reliably outperform lower-ranking states on economic measures, as succinctly described in a recent analysis by Governing magazine. Minnesota, for example, ranked dead last in this year’s Tax Foundation ranking but has an unemployment rate of 5.1 percent – compared to 8.7 percent in Georgia. Other supposedly unfriendly tax states, such as Maryland, New Jersey and Connecticut, have among the highest wages and household incomes nationwide. Unfortunately, lawmakers in states such as North Carolina and Kansas have used the Tax Foundation’s rankings to argue that deep tax cuts are necessary for economic growth – a misguided move that has led to dire cuts in schools and other services that both businesses and residents rely on.

Georgia should definitely be considering how to strengthen its economy and create more good-paying jobs, but the Tax Foundation’s report is a poor place to start. Why? Because being business-friendly is not only about taxes. Well-trained workers, high-quality roads and other infrastructure, and world-class schools are arguably more important to business success than state and local taxes. Making sure Georgia remains a good state to start a business and raise a family requires strategic investments in those resources, as well as sound tax policy. So-called business tax climate rankings give us little or no guidance on either.

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