Tax Foundation State Business Climate Index Archives - Michigan Future Inc. https://michiganfuture.org/tag/tax-foundation-state-business-climate-index/ A Catalyst for Prosperity Tue, 12 Jul 2022 09:50:23 +0000 en-US hourly 1 https://michiganfuture.org/wp-content/uploads/2024/01/cropped-MFI-Globe-32x32.png Tax Foundation State Business Climate Index Archives - Michigan Future Inc. https://michiganfuture.org/tag/tax-foundation-state-business-climate-index/ 32 32 Detailing the failure of Michigan’s low-tax strategy https://michiganfuture.org/2022/07/detailing-the-failure-of-michigans-low-tax-strategy/ https://michiganfuture.org/2022/07/detailing-the-failure-of-michigans-low-tax-strategy/#respond Thu, 14 Jul 2022 12:00:00 +0000 https://michiganfuture.org/?p=14982 Michigan’s low-tax strategy has failed. Since 2000 Michigan has experienced––in good times and bad and no matter which party has been in control in Lansing––far worse than the nation employment and wage growth. In 2000 Michigan accounted for 3.6 percent of the nation’s employment. In 2021 it had fallen to 2.9 percent. If Michigan’s employment […]

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Michigan’s low-tax strategy has failed. Since 2000 Michigan has experienced––in good times and bad and no matter which party has been in control in Lansing––far worse than the nation employment and wage growth.

In 2000 Michigan accounted for 3.6 percent of the nation’s employment. In 2021 it had fallen to 2.9 percent. If Michigan’s employment were still 3.6 percent of the nation’s there would be 855,000 more Michiganders employed today.

The story is the same for average wages. Michigan falling from 3.5 percent above the nation in 2000 to 9.3 percent below in 2021. If Michigan’s average wage was still 3.5 percent above the nation’s, average wages here would be $184 higher each week than they are today. For full-time, year-round workers that is an additional $9,568 per year.

This despite Michigan ranking 12th in the Tax Foundation’s 2022 State Business Tax Climate Index.

Why has Michigan’s low-tax strategy failed? In a recent sponsored article Business Leaders for Michigan got it exactly right when they wrote:

Businesses go where the talent is based. Michigan is in a race with other states for talented people to fill jobs. The availability of highly skilled and educated workers will make the difference between states that excel and those that fall behind in the decades ahead.

We now live in an economy where talent attracts capital. Where talent––particularly those with a four-year degree or more–– is the asset that matters most to and is in the shortest supply for high-growth/high-wage employers. Quite simply, the places with the greatest concentrations of talent win.

You can see the importance of talent concentrations by looking at computer systems design and software publishing. These are very much talent-driven industries. And they are prototypical of the economy’s high-growth/high-wage, knowledge-based industries.

Since 2000 computer system design companies have added a little more than one million jobs with an average weekly wage of $2,983 more than double the national average. Since 2000 software publishing companies have added a little more than 300,000 jobs with an average weekly wage of $4,071 just shy of triple the national average.

In 2000 Michigan had 3.6 percent of the nation’s computer system design jobs. In 2021 it had fallen to 2.0 percent. Michigan added less than one thousand of the one million new jobs in the industry. In software publishing the story is the same: Michigan falling from an employment share of 3.0 percent to 1.3 percent. In an industry that added 300,000, Michigan suffered a decline of about 700 jobs .

Contrary to conventional wisdom, Michigan having far lower average weekly wages in both industries––$2,284 in computer system design and $2,612 in software publishing––did not give the state a competitive advantage.

It should not be a surprise that Michigan is noncompetitive in both of these industries. Talent concentration––not low taxes or low wages––is the asset that matters most to knowledge-based enterprises. This is the prime lesson that Michigan should have learned––but so far has not––from our failure to be competitive for Amazon HQ2. They told us quite clearly that Michigan does not have the talent concentrations required to be competitive at any scale for knowledge-based business investments.

For Michigan and its regions to be competitive with leading-edge/high-prosperity communities we need to completely redesign our economic development strategy and practice. That means moving away from the low-tax economic development playbook to one that makes preparing, retaining and attracting talent economic development priority #1. Staying the course means accepting being a low-prosperity state structurally.

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Indiana’s failed low tax economic strategy https://michiganfuture.org/2022/06/indianas-failed-low-tax-economic-strategy/ https://michiganfuture.org/2022/06/indianas-failed-low-tax-economic-strategy/#respond Tue, 07 Jun 2022 12:00:00 +0000 https://michiganfuture.org/?p=14950 A decade ago in a column for Dome we made the case that Indiana’s low tax economic strategy was a failure and would continue to fail going forward. We wrote: The Mackinac Center for Public Policy on Monday is hosting an event with Indiana Governor Mitch Daniels as the featured speaker. This is a continuation […]

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A decade ago in a column for Dome we made the case that Indiana’s low tax economic strategy was a failure and would continue to fail going forward. We wrote:

The Mackinac Center for Public Policy on Monday is hosting an event with Indiana Governor Mitch Daniels as the featured speaker. This is a continuation of a decades-long tradition of inviting Indiana governors — mainly Republican — to tell us the policies they have pursued to grow the Indiana economy, so we can learn from them what to do.

One problem: Indiana is today, and has been for decades, the poorest and least educated Great Lakes state. That’s right. Even after Michigan’s awful so-called lost decade, Indiana is poorer than we are.

What Indiana is best at among the Great Lakes states is adherence to the low tax/small government policies advocated by conservatives as the magic elixir to grow the economy. In the 2011 state rankings by the well-respected conservative Tax Foundation, Indiana is the highest ranked Great Lakes state on both overall state business climate (10th) and corporate tax index (21st). The latter is the lever the Snyder Administration has argued is the most important to growing the Michigan economy.

But for the vast majority of Michiganders who care about whether they have a job and a good income to raise a family, Indiana doesn’t look so good. Indiana’s per capita income, proportion of households with incomes of $75,000 or more, poverty rate and proportion of adults with a four-year college degree are all the worst among Great Lakes states.

Fast forward a decade an important new report from Michael Hicks, director of The Center for Business and Economic Research at Ball State University and professor of economics in the Miller College of Business, chronicles the failure of Indiana’s low tax economic development strategy over the past decade. Hicks writes:

The ten-year span of 2009-2019 saw the longest economic expansion in U.S. history. Indiana began this recovery period behind the nation in almost every important economic metric and then fell farther behind throughout the decade.

Indiana’s weak recovery saw the state perform much worse than the nation in measures of job creation, GDP growth, population growth, productivity growth, and personal income growth. The causal factor in this decline is the state’s relatively declining levels of educational attainment.

Hicks attributes this much worse than the nation economic performance to the state’s low tax economic strategy in an economy where college attainment––specifically four-year degree attainment–-is the defining characteristic of prosperous states. Hicks writes:

… Since 2010, in real terms, state and local governments have spent an additional $5 billion on business tax incentives, but added only $17 million to the budgets of colleges and universities. The intent of this funding shift was to ensure Indiana remained a low-tax state. Proponents believed the supply-side effects of this environment would attract new businesses and boost employment opportunities, wages, labor productivity, and overall economic growth. This approach enjoys widespread political support, but there is little to no empirical support.

By employing data on GDP growth and the Tax Foundation’s data on total state tax burdens, we see the elusive nature of this relationship. From these most basic data there is no statistically or economically meaningful relationship between tax rates and growth.

In the wake of these policies, the Indiana economy grew slowly and the job growth that occurred was clustered at the low end of the skill and income distribution. The productivity of Hoosier workers (average product of labor) lagged significantly, and the incomes declined relative to the nation as a whole. Business growth plummeted and measures of economic wellbeing across many domains languished. In short, the low-tax, policies pursued from 2010 through 2019 failed to produce broad economic growth.

Hicks analysis is important to those of us in Michigan because Michigan has for decades been following the same low tax economic playbook as Indiana with the same poor economic results. One can make a strong case for the past two decades Michigan’s decline compared to the nation is worse than Indiana’s. The chart below shows per capita income from 2000-2021 for the U.S., Michigan and Indiana.

In 2000 Michigan’s per capita income was one percent below the nation’s. Indiana was eight percent below. By 2009––the depths of the Great Recession––both Michigan and Indiana had per capita income 13 percent below the nation’s. In 2021 Michigan per capita income is 12 percent below the nation’s. Indiana’s is 11 percent below.

Both states are now structurally low prosperity. Michigan ranks 34th, Indiana 33rd in per capita income. This despite Michigan ranking 12th in the Tax Foundation’s 2022 State Business Tax Climate Index. Indiana ranked 9th. As Hicks says “From these most basic data there is no statistically or economically meaningful relationship between tax rates and growth.”

In the 2011 column we identified talent as the asset that mattered most to state and regional prosperity. We wrote:

Our basic conclusion is that what most distinguishes successful areas — such as Minnesota, which has all of those attributes — from Michigan is their concentrations of talent, where talent is defined as a combination of knowledge, creativity and entrepreneurship. Quite simply, in a flattening world where work can increasingly be done anyplace by anybody, the places with the greatest concentrations of talent win.

States and regions without concentrations of talent will have great difficulty retaining or attracting knowledge-based enterprises, and they are less likely to be the place where new knowledge-based enterprises are created. The knowledge-based economy is now the path to prosperity Michigan must pursue.

Pursuing that path means preparing, retaining and attracting talent is economic development priority #1. If we do everything else well that we call economic development and we don’t get younger and better educated, Michigan will continue to get poorer compared to the nation.

Michigan has lagged in its support of the assets necessary to develop the knowledge-based economy at the needed scale. Building that economy is going to take a long time and require fundamental change. But the data show it is the only reliable path to regaining high prosperity.
There are no quick fixes. The Michigan economy is going to continue to lag the nation for the foreseeable future. But there is a path back to high prosperity. The framework for action is:

• Build a culture aligned with (rather than resisting) the realities of a flattening world. We need to place far higher value on learning, an entrepreneurial spirit and being welcoming to all.
• Creating places where talent — particularly mobile young talent — wants to live. This means expanded public investments in quality of place with an emphasis on vibrant central city neighborhoods.
• Ensuring the long-term success of a vibrant and agile higher-education system. This requires a renewed commitment to public investments in higher education — particularly the major research universities.
• Transforming teaching and learning so that they are aligned with the realities of a flattening world.
• Developing new private and public sector leadership that has moved beyond both a desire to recreate the old economy as well as the old fights. Michigan needs leadership that is clearly focused, at both the state and regional level, on preparing, retaining and attracting talent.

The world has changed fundamentally. The choice we face is this: do we do what is required to build the assets needed to compete in a knowledge-based economy or do we accept being a low-prosperity state?

Michigan decided to stay the low tax course. And got the anticipated results: becoming structurally a low-prosperity state. A decade later the choice the state faces is the same: do we make preparing, retaining and attracting talent economic development priority #1 or do we accept continuing to be a low-prosperity state?

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Why do we want to be like those states? https://michiganfuture.org/2017/03/want-like-states/ https://michiganfuture.org/2017/03/want-like-states/#comments Fri, 17 Mar 2017 11:54:07 +0000 https://www.michiganfuture.org/?p=8503 In my last post we looked at evidence that the most prosperous non-energy states were those with the highest college attainment, not the lowest taxes. In this post I want to look at the states the tax cutters in Lansing are telling us we need to emulate. The argument of many advocating for an elimination […]

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In my last post we looked at evidence that the most prosperous non-energy states were those with the highest college attainment, not the lowest taxes. In this post I want to look at the states the tax cutters in Lansing are telling us we need to emulate.

The argument of many advocating for an elimination of the state income tax was Texas and Florida don’t have an income tax and they are strong economy states. Think again! Texas is 24th in per capita income and Florida is 28th. Yes slightly better than Michigan’s 32nd. But not close to the Great Lakes’ best Minnesota at 14th or #1 Connecticut. Per capita income in Texas is nearly $22,000 lower than Connecticut. For Florida its more than $24,000.

Yes Texas and  Florida are low tax states, they rank 14th and 4th overall in the latest Tax Foundation  State Business Climate Index. Connecticut ranks 43rd.  Connecticut has a graduated income tax with a top marginal rate of 6.99 percent. Minnesota––which is ranked 46th by the Tax Foundation––also has a graduated income tax with a top rate of nine percent. So much for lower taxes leading to higher prosperity.

(Washington is the one top 15 per capita income state that does not have a state income tax. But they also are 11th in the proportion of adults with a four-year degree or more.)

As we saw in my last post what aligns with high per capita income is the proportion of adults with a four-year degree or more. On that measure Connecticut is 4th, Florida is 28th and Texas is 30th. Michigan is 32nd in per capita income, 32nd in the proportion of adults with a four-year degree or more and 12th in the Tax Foundation rankings.

Let’s move on to the case Business Leaders for Michigan is making for big new tax breaks for business making investments in Michigan. They claim we aren’t competitive with Ohio, Indiana, South Carolina and Kentucky. Which begs the question “why do we want to compete with them?”

Ohio is 30th in per capita income, Indiana is 36th, Kentucky is 43rd and South Carolina is 45th. It will come as no surprise that all four are low college attainment states. Ohio ranks 37th, Indiana 42nd, Kentucky 46th and South Carolina 36th.

To BLM’s credit one of their goals for Michigan is becoming a top ten state in per capita income. But its hard to figure out how we are going to get there trying to adopt the policies of states that are towards the bottom in per capita income.  For years we have said you can’t get Minnesota’s economy with Mississippi’s policies. Substitute Ohio, Indiana, Kentucky and South Carolina for Mississippi and you still won’t get Minnesota’s economy.

 

 

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