Rankings Say Little About States’ Real Business Climate

If someone told you a city’s average temperature but not how much it rains there, how would you know whether you liked its climate?  The Tax Foundation’s annual ranking of states’ “business tax climate” is similarly lacking.

In the Tax Foundation’s scale, how a state compares to other states starts and ends with its taxes — generally, the lower the better.  But tax levels don’t tell you if the schools are good, the transportation system is state of the art, or communities are safe.  All of those, not just taxes, determine a state’s economic fortunes — as this study from the Federal Reserve Bank of Cleveland on the importance of education shows.

And since schools, roads, and other necessities cost money, the ranking actually rewards states that don’t invest in what makes them attractive places to live and work.  The Tax Foundation this year gave its top ranking to Wyoming, a state with not a single Fortune 500 company.  If the rankings were meaningful, the streets of Cheyenne should be crawling with CEOs.

Peter Fisher of the Iowa Policy Project, whose book “Grading Places” shows why rankings like these are suspect, points out that the Tax Foundation study doesn’t even accurately report the actual amount of taxes that businesses pay in a state:

Rather than measuring what businesses actually pay, [it] instead focuses on selected characteristics of the tax code while ignoring significant features.  Results differ wildly from a ranking based on what businesses pay in many cases.

As a result, “In some cases, lower taxes actually produce a worse score” in the Tax Foundation rankings.

Fisher concludes, “What this annual release offers is, at its core, an indefensible mish-mash of ‘Stuff the Tax Foundation Doesn’t Like,’ which should be the title.”  He’s right.