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Kansas Liberty: 15 December 2008
Tax hikes aren't the answer to state's budget woes, economist says
Study: Kansas ranks 31st in business-friendliness
Granted, it’s not the nightlife capital of the world, and its climate leaves something to be desired, but Kansas still has many things that work in its favor in attracting new businesses and the jobs they bring.
Those qualities include a relatively low cost of living, a relatively highly educated work force, excellent highways, a very central geographic location and a low crime rate.
But, when you factor in state government regulation and taxation, Kansas loses some of its luster in the eyes of prospective corporate residents.
That analysis is according to the Small Business & Entrepreneurship Council, which last week released its annual Business Survival Index.
The index, which ranks states in terms of the friendliness of their business climates, placed Kansas in the bottom half of states, at 31.
“There are a lot of variables that influence where a company might locate,” study author Raymond Keating, the SBE Council’s chief economist, told Kansas Liberty Monday.
“What we focus on is the public policy aspect," Keating said. The answer to one question in particular, he said, carries great weight: "Is state government a plus or minus?”
The verdict in Kansas is evident in the state’s low ranking, and that low rating is accentuated with the economy now officially in recession.
“The tax and regulatory structure of a state becomes more important in a down economy,” he said.
Keating said Kansas’ ranking could suffer even more, depending on how Gov. Kathleen Sebelius and the Kansas Legislature address the state’s current budget crunch. He added that other states that have achieved high rankings have taken action in the areas of regulation and taxation that could be instructive to Kansas’ budget-makers.
When the Kansas Legislature convenes in January, it will have to grapple with a projected current fiscal year deficit of $141 million, and a projected deficit of $1.02 billon by June 30, 2010, the end of the next fiscal year.
Because the state is constitutionally prohibited from running a budget deficit, lawmakers, in conjunction with the governor, have to close that gap, using either spending reductions or tax increases, or a mix of both.
Kansas is not alone among states facing budget crises. Keating said in almost every case, the culprit has been runaway spending.
“Over the most recent six years, from 2000 to 2006, per state and local government spending has accelerated at better than twice the rate of inflation,” Keating wrote in a statement issued with the study. “Clearly, government has a spending problem, and it is getting worse.”
That’s painfully true in Kansas. Since 2004, the state’s general fund budget has grown $2 billion. That an increase of about 50 percent. In other words, since 2004, state government spending has doubled.
Keating said to the extent possible, Kansas should stay away from tax increases if it wants to prevent a further erosion of its business climate. In fact, he said states that have been among the most business-friendly states have reined in spending, while stabilizing or even lowering tax rates.
“When confronted by current economic and budget woes,” Keating said in the release, “lawmakers in the states can address the real issue by reining in the size of government, or they can ignore the ultimate cause, and choose to, for example, hike taxes and fees, and/or seek more handouts from the federal government (i.e., federal taxpayers).”
He said the five states that earned top ratings this year have very favorable tax structures that are attractive to jobs producers.
“Lightening the governmental burdens on entrepreneurship and investment is a big plus for a state's competitiveness and economy,” he said. “Particularly given the current recession, do state and local lawmakers really want to make it more costly to invest and do business in their state?”
- Phil LaCerte
Resources:
Day-Care bill clears Senate
Parkinson's pick for SOS could become advantage for Dems
Are low taxes and minimal regulation all that matters?
http://www.sbecouncil.org/uploads/sbsi%202008%5B1%5D1.pdf
Nearly every component of this index deals with the tax and regulatory environment imposed by states. That is, it is assumed that the major reason one would want to start a business in one location versus another - New Jersey versus North Dakota - is the favorable state tax policy and regulation (minimum wage, etc.).
It would seem to me that this is a relatively limited if not utterly useless perspective. Indeed, among bordering states and within commutable regions at state boundaries such comparisons might be relevant. An individual who wishes to live in a particular region and/or recruit employees with specific skills that may be obtained within that region, might choose to open shop a few streets or miles away in the more favorable state.
However, from a broader, national perspective, issues such as access to human capital, intellectual and cultural environment are critical to at least some if not many small business and entrepreneurial endeavors.
Let’s consider, for the moment, the relationship between 3 different measures -
1. Small Business Survival Index
2. Gross State Product per Capita
3. The Percent of High Schools Achieving a Silver or Gold Rating from U.S. News
Across states, the correlations between these figures look like:
GSP and SBSI (higher is bad) = .1662
A weak correlation, but a positive one, suggesting that on average, states more “hostile” to small business have higher gross state product per capita. Hmm… how can that be?
GSP and % of High Schools Gold or Silver = .4406
A reasonable positive correlation and statistically significant. Indeed states with more resources may be able to allocate more resources to providing high quality schools. That means taxes. Alternatively, and related, states with highly educated and productive adult populations may emphasize the importance of high level education to their children leading to not only higher participation but higher success rates on AP and IB tests (the underlying elements of the U.S. News HS Rankings).
SBSI and % of High Schools Gold or Silver = .3554
This is also a reasonably positive and statistically significant correlation, indicating that states with more high-end high schools have, on average, less favorable tax policy for small business.
Now… If I’m thinking of starting a small business that relies on intellectual capital and/or creative energy, and if I’m unlike most people and can choose to locate that start-up business anywhere in the country, then I get to make the trade-off decision as to whether I prefer favorable tax climate or intellectual capital and creative energy.
I may be wrong, but it strikes me that the latter is far more important to building a successful business. One might argue that the heavier tax burden is, in part, a premium one pays in order to be in a region with the creative, intellectual work force I need.
Further, if I want to recruit and retain an adult workforce that is going to stick with the business, I need to be recruiting them to work in an area where they feel comfortable raising their children and sending them to school.
In other words, I’m picking Massachusetts, New Jersey or California before South Dakota or Nevada, in spite of the wisdom presented by the authors of the Small Business Survival Index. Quite simply, small business survival is far more contingent on the quality (relevant qualities) of one’s workforce than on the marginal differences in tax policy.
Now, Kansas is in an awkward position. Kansas has below average gross state product per capita and ranks 40th in the percent of high schools making the U.S. News Gold/Silver list. And, as you note, Kansas does not have favorable tax/regulatory environment (at least in relative terms as measured by SBSI). Not good for Kansas