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#1 State Tax Ranking Is Highly Misleading

November 19, 2015 at 3:15 PM

Wyoming gets the number one ranking in the Tax Foundation’s “2016 State Business Tax Climate Index” — the group’s misleading gauge of state tax systems — largely because of what the state doesn’t have: an income tax on either people or businesses.  In the Tax Foundation’s view, that’s a good thing. But as analysts have pointed out time and time again, the claim that low state taxes are key to a strong economy is simplistic.

For example, it ignores what states do with the tax revenue they collect — building and staffing schools to prepare students for good jobs, maintaining a top-quality transportation system to move goods to markets, and providing other building blocks of economic growth.  (The Tax Foundation’s index has a number of other problems, too, most of which economist Peter Fisher has detailed in an excellent review.  For one thing, the index doesn’t accurately reflect the actual taxes that businesses pay in each state.)

New Jersey, which has both individual and corporate income taxes, ranks last in the Tax Foundation report, even though it’s home to 20 Fortune 500 companies (20 more than Wyoming) and has the nation’s fifth-highest percentage of residents with bachelor’s degrees (Wyoming is 40th).

The Tax Foundation only briefly mentions some non-tax factors that people and businesses typically judge very important in deciding where to locate, like infrastructure or a skilled labor pool.  But while the report acknowledges that these “other concerns also matter,” the index doesn’t measure their value.  It’s all about taxes — generally the fewer and the lower, the better.

And since schools, roads, and other necessities cost money, the index actually rewards states that don’t invest in what makes them attractive places to live and work. 


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