Business climate rankings don’t give the full story

Business climate studies are a popular way to rank states. The Tax Foundation in Washington, D.C. just released its 2014 State Business Tax Climate Index ranking Minnesota 47th, while Forbes recently named Minnesota as the 8th best state for business.

As these two rankings show, various business climate ranking methods produce wildly different results that don’t necessarily predict how well a state’s economy is performing, as a comprehensive analysis from Good Jobs First has found.

The Star Tribune’s Adam Belz noted that, “Despite its low ranking [on the Tax Foundation’s index], Minnesota’s economy was the fifth-fastest growing in the nation in 2012 and the unemployment rate in August was 5.1 percent, compared with a 7.3 percent U.S. jobless rate.”

The Tax Foundation’s State Business Tax Climate Index takes a scorecard approach that measures states based on what tax policies are in place. This is a good methodology if the question is whether states have implemented the policies that the Tax Foundation prefers, but it is not a measure of whether businesses are actually succeeding in that state.

The Tax Foundation ranks states solely according to taxes – corporate, income, sales, property, and unemployment insurance. The index favors a regressive tax system, one where low- and middle-income residents pay a higher share of their incomes in taxes than high-income residents.

The Tax Foundation’s ranking does not account for the quality of the workforce, access to transportation hubs, or other factors that also contribute to business success; and over-emphasizes the importance of state and local taxes, which represent a small percentage of total business costs.

What it boils down to is this: when evaluating a particular business climate ranking, it’s worth a closer look at what specifically it is measuring. Economic performance is the truest measure of whether Minnesota has been right to invest in our workforce and quality of life and to fund those investments in a relatively less regressive way.

-Caitlin Biegler

About Caitlin Biegler

Caitlin Biegler is the Minnesota Budget Project’s policy analyst. She researches and writes about state tax and budget issues. Caitlin holds a Master of Public Policy degree from George Washington University in Washington, DC; and a Bachelor of Science degree in Public Health from Tulane University in New Orleans, LA. She interned at the DC Fiscal Policy Institute in Washington, DC, Third Way in Washington, DC, Lutheran Social Services, and the Alabama State Office of Primary Care and Rural Health.
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2 Responses to Business climate rankings don’t give the full story

  1. Minnesota ranks 47th on the Tax Foundation’s State Business Tax Climate Index, meaning that Minnesota ranks low on the degree to which our tax system matches the policies that the Tax Foundation prefers. To rank higher on the index, states get points for a flat income tax or none at all and broader sales taxes on consumer purchases, among other measures.

    One consequence of pursuing such policies is that a tax system becomes more regressive. In tax policy, this means that low- and middle-income households pay a higher share of their income in taxes.

    When we refer to Minnesota being relatively less regressive, we are referring specifically to how our state compares to others on tax regressivity. Almost all state tax systems are regressive, but the latest Minnesota Tax Incidence Study showed Minnesota to be the 15th least regressive state in the nation.

  2. Darren says:

    I completely agree that there is most likely no study on this topic that will give the definitive answer. However, as a commercial banker, I do find that business owners are very concerned about tax policies of a given state or locale. It is one of the factors that goes into business planning and expansion by management and does deserve a seat at the discussion table. However, we must also be careful that we do not trivialize by stating that the Minnesota tax climate is “relatively less regressive” even though you reference that the bias of a study makes it the 47th most regressive tax climate in the nation. A ranking of 47th on the surface does not sound “relatively less” but rather “one of the most.”