We’re number 17!

The latest sign of the state’s slow improvement in business climate comes from CNBC.com’s America’s Top States for Business, which improved Wisconsin from 25th a year ago to 17th.

As I wrote here a year ago, this comparison “measures the states by their own standard: the selling points they use to attract business. We separate those pitches into the ten categories, which are then weighted in the study based on how frequently the states use them as selling points.”

Most business climate comparisons rate states based not on the seller’s perspective, but the buyer’s — that is, the perspective of businesses that have to deal with the tax and regulatory structures of each state, as well as the other things that go into a state’s share of the U.S. economy. The “buyer” is the one deciding to do business, or not, in a specific place, but it’s interesting to see how a state does what it claims to do,  or be good at doing.

Wisconsin ranked below Minnesota (11th), Iowa (12th) and Indiana (14th), but ahead of Ohio (25th), Illinois (26th), Missouri (27th) and Michigan (33rd). Wisconsin also got closer to the three Midwestern states ranked better than Wisconsin while leaping over Missouri, which are positives.

Wisconsin’s 17th ranking is the sum of ranking 15th in cost of doing business, 43rd in workforce, 14th in quality of life, sixth (up from 22nd) in infrastructure and transportation, 34th (down from 22nd) in the economy, 10th in education, 20th in technology and innovation, 27th in business friendliness, 27th in access to capital and 23rd in quality of life.

CNBC explains the economy ranking thusly: “A solid economy is good for business. So is a diverse economy, with access to the biggest players in a variety of industries. We looked at basic indicators of economic health and growth.”

That suggests (besides being merely top third now overall) that a lot of work still needs to be done by the Walker administration and the Legislature. The corporate income tax rate of 7.9 percent gives Wisconsin (when added to the federal corporate income tax rate) one of the highest corporate income tax rates in the world. The 7.75-percent personal income tax bracket affects every owner of a subchapter-S corporation. As for “access to the biggest players in a variety of industries,” just nine of the S&P 500 has operations in this state.

The economy ranking also shows that state government did not do enough in 2011 to improve the state’s economy. Replacing the Department of Commerce with the Wisconsin Economic Development Corp. was only a start. Appointing more business-friendly administrators across state government was only a start. Creating job-creation tax credits doesn’t cost state government money if no jobs are created, but businesses don’t make job creation decisions based on job tax credits.

As for the workforce ranking, “We rated states based on the education level of their workforce, as well as the numbers of available workers. We also considered union membership. While organized labor contends that a union workforce is a quality workforce, that argument, more often than not, doesn’t resonate with business. We also looked at the relative success of each state’s worker training programs in placing their participants in jobs.”

That sentence about unions and business makes one wonder if a brave legislator can be found to introduce a bill banning closed shops in Wisconsin. The educational level measure is also interesting given that there are a lot of college-educated people among the unemployed today.

I’m not going to mention further the improvements in rankings, because this blog doesn’t exist to be a cheerleader for this state or for Gov. Scott Walker or Republicans. Wisconsin was ranked in the top five in no area. An eight-position overall jump didn’t warrant inclusion on CNBC’s list of most-improved states. Even Walker’s congratulatory news release admits:

“This improvement in our ranking shows we are on the right track,” Governor Walker said.  “We’ve made great strides in improving the business climate in the state over the past year and a half, but there is more work to be done.”

There certainly is. For one thing, legislators need to create a mechanism to essentially prevent taxes from increasing in the way that Walker’s predecessor and the 2009–10 Legislature increased taxes. Everyone whose fingerprints are on those tax increases is directly responsible for Wisconsin’s poor business climate rankings up until the past year, because while business climate comparisons differ in what they measure and to what extent, every single one of them prominently includes taxes.

Does that require a Taxpayer Bill of Rights? A supermajority requirement or voter referendum to increase taxes? Do them all, as far as I’m concerned.

To finish in the top third among the states is better than finishing in the middle. (And it’s certainly better from the state’s 37th ranking in 2008.) But 17th isn’t nearly good enough. State government’s goal should be for the state to finish number one in the Midwest and, at a minimum, in the top five nationally, regardless of the business climate comparison.

We’re number 20!

One year ago, Chief Executive magazine surveyed the state’s business climate, and jumped its ranking of the state from 41st best to 24th best among the states.

That 17-place jump was best of any state in the country — and was a bigger jump than any state in Chief Executive’s 2012 comparison — which prompted a logical question: How in the name of Darwin Smith did that happen?

This year, almost 1½ years into the Walker administration, Chief Executive‘s survey of 650 business leaders (up from  550 a year ago) jumped Wisconsin another four spots, from 24th to 20th.

Chief Executive’s CEOs give Wisconsin three stars for taxes and regulation, and four stars each for workforce quality and living environment. I’m surprised we did as well as three stars for our (too high) taxes and (too much) regulation, but evidently CEOs believe things are going in the right direction.

The magazine quotes two anonymous CEOs:

“We only do business in Wisconsin. Since Gov. Walker was elected we have seen a significant improvement in taxes and business conditions.”

“In our home state of Wisconsin there is a palatable enthusiasm amongst business executives that we are roaring back due to a clear vision of job creation (e.g. mining in the north) and stable state budgets (allowing us to take more risks).”

(The survey took place before Democrats and Sen. Dale Schultz (RINO–Richland Center) killed mining in the north.)

Texas leads the survey, and California ranks dead last. Chief Executive passed on CEO comments about the (formerly) Golden State:

  • California is the worst! They are doing everything possible to drive a business out of their state. If it were not for the climate, they would have lost half their population.
  • California regulations, taxes and costs will leave only tech, life sciences and entertainment as viable. If you aren’t an elitist, no room here for the middle or working classes.
  • California treats business owners like criminals. California has different overtime policies for its own employees vs. private sector.
  • California’s labor regulation is a job killer. We will be moving our business out of the state, which will lose hundreds of jobs simply due to the poor regulatory environment.
  • California should secede from the union—it is like doing business in a foreign country, it has its own exchange rate, and its regulation is crazy.

As for Texas, Chief Executive listed the businesses that chose to move there:

  • Allstate, builds $12 million customer center in San Antonio. Reasons: Weather and lifestyle, plus Spanish-language capabilities.
  • Caterpillar, building plants in Seguin and Victoria. Reasons: Access to cheaper, non-union labor; proximity to ports for exporting.
  • eBay/Pay Pal, hiring more than 1,000 and expanding support facilities in Austin. Reasons: Access to tech talent, $2.8 million from the Texas Enterprise Fund.
  • Facebook opens first U.S. operation outside of California, in Austin. Reasons: Access to creative and technical talent.
  • GE Transportation, announces $96 million locomotive plant in Fort Worth. Reason: Cheaper, non-union labor
  • Grifols USA, California-based subsidiary of Spanish parent, opens blood plasma testing facility San Marcos. Reason: Right skills sets, languages
  • PETCO, in San Diego, opened its first customer support center outside of California in San Antonio in 2011. Reason: Access to cheaper space, skilled workers, funding from the Texas Enterprise Fund.

CEOs are the people who sign off on hiring decisions and expansion and location decisions. So if legislators and would-be governors (this means you, Tom Barrett and Kathleen Falk!) are serious about improving this state as a place to do business, that means they had better listen to business people.

Speaking of BarrettFalk, Chief Executive noted the Recallarama drama, which is culminating in Walker’s illegitimate recall June 5:

Governor Scott Walker’s battle with the unions in Wisconsin (See “Will Wisconsin Rise Again?”), a state that edged into the top 20 this year for this first time, demonstrates that the struggle for a pro-growth agenda can be contentious. As one Badger State business leader remarked, “Finally, Wisconsin is headed in the right direction.”

Chief Executive adds stats that serve to condemn Walker’s predecessor, Gov. James Doyle, and the previous party in charge in the Legislature. Wisconsin’s gross state product dropped 1.45 percent between 2007 and 2010, which is a 33-percent worse drop than the equivalent drop in Gross Domestic Product. During the 2000s, nearly 12,000 more people moved out of Wisconsin than moved into Wisconsin. And to use a fact that condemns both Doyle and Walker, state and local taxes are 18 percent higher than the national average.

I’ve maintained Wisconsin hasn’t done enough to improve the state’s business climate, and Wisconsin certainly hasn’t cut taxes to any appreciable extent. But apparently the progress Wisconsin has made has gotten notice. The survey lists the state’s Development Trend as “positive,” summarizing, “New conservative statehouse is shaking things up, drawing business favor.”

Whether that continues depends on what happens June 5 and Nov. 6.

We’re number 40!

The latest sign that the Legislature and Gov. Scott Walker haven’t done enough for the state’s business climate comes from the Kauffman Foundation and its annual index of entrepreneurial activity.

Wisconsin ranked 40th among the states in entrepreneurial activity in 2011, with 28 percent less entrepreneurial activity per 100,000 adult residents than the U.S. as a whole. According to Kauffman’s methodology, in 2011 230 Wisconsinites per 100,000 adult population counted as “entrepreneurs,”  whereas 320 Americans per 100,000 population counted as “entrepreneurs.”

That, believe it or not, is a substantial improvement  from 2010, when Wisconsin ranked only above West Virginia, with  almost half the entrepreneurial rate of the U.S. as a whole. Growing to 40th put Wisconsin near the Midwestern average for entrepreneurship, but Wisconsin (and most of the Midwest) pales in entrepreneurial activity compared with states like Arizona (520 per 100,000 adults), Texas (440 per 100,000 adults), California (440 per 100,000 adults) and Colorado (420 per 100,000 adults).

All this is important because, the report begins …

The Kauffman Index of Entrepreneurial Activity is a leading indicator of new business creation in the United States. Capturing new business owners in their first month of significant business activity, this measure provides the earliest documentation of new business development across the country. … The Kauffman Index reveals important shifts in the national level of entrepreneurial activity and shifts in the demographic and geographic composition of new entrepreneurs across the country.

It is an economic development given that new businesses are where the largest number of new jobs are created. In Wisconsin, according to the Tax Foundation, the business tax climate is much more conducive to new businesses than to established businesses.

The Midwest doesn’t appear to be an entrepreneurial hotbed when measured by metropolitan areas either. Of the 15 largest Metropolitan Statistical Areas, Chicago (including southeast Wisconsin) and Detroit had the worst entrepreneurship rates, one-third as much as Atlanta, Phoenix and Los Angeles.

Wisconsin has not always been an entrepreneurial laggard. In the 1999–2001 period, Wisconsin had a slightly higher entrepreneurial rate than the U.S. as a whole. Wisconsin’s oldest and most established companies started as entrepreneurial concerns — someone with an idea he could develop, or an employee who thought he could do something better than his employer — and this state has a long list of business innovations in its history.

And yet, the decade of the 2000s appears to have been an entrepreneurial bummer in Wisconsin, with both having parties having controlled the Legislature, but one having been in the Executive Residence most of that time. That would be the administration of Gov. James Doyle, which raised taxes by $2.1 billion, yet made state finances some of the worst in the nation. The executive branch, not the legislative branch, creates regulations and hires the regulators, an important reason why taxes never say the whole story about a state’s business climate. And Wisconsin has the Department of Neverending Regulations, formerly known as Damn Near Russia, the state equivalent of the U.S. Employment Prevention Agency (EPA).

Proving that some people don’t get it, the Milwaukee Journal Sentinel has one of the Doyle (mis)administration’s economic marketers, Zach Brandon, now of the Wisconsin Angel Network:

In Wisconsin, however, a vibrant angel investing environment has helped fuel start-up growth, said Zach Brandon, director of the Wisconsin Angel Network.

“Year after year of record angel investing growth has fueled Wisconsin entrepreneurial activity, but the inability to pass comprehensive growth capital legislation at the state level puts this momentum at risk,” Brandon said.

That would be a “vibrant” environment only if you’re comparing it to no angel investment at all. Every business climate study conducted before the 2010 election concluded that Wisconsin’s angel investing environment was somewhere between below average and abysmal. Brandon’s boss, Doyle, could have insisted the Legislature pass “comprehensive growth capital legislation” at any point during Doyle’s eight years in office. Apparently Doyle was too busy figuring out how to increase taxes and generate billions of dollars in deficits to figure out how to create “comprehensive growth capital legislation.”

Of course, one should not expect any of those who want to be the next Democratic governor to do better than Gov. Scott Walker. At a forum of Democratic gubernatorial recall candidates Thursday came up with these winning statements, only one, Sen. Kathleen Vinehout (D–Alma), said something that could be considered less than lockstep anti-business: “We must stop pitting business against labor and driving a wedge between the public and private sectors.” When the headline of the story reads “Democrats in recall race zero in on wealthy,” and we all know that those evil “wealthy” are those who start businesses, create jobs and serve their customers, you can rest assured the Democratic Party should change its name to the We Hate Business Party.

Meanwhile, I eagerly await the Walker administration’s plans to really improve — that is, from mediocre at best to the best in the nation — the state’s business climate, which will benefit not just entrepreneurs, but, most importantly, business’ employees. It hasn’t happened yet, and it’s not happening right now.

35 or number four

The Tax Foundation has a new study on one of this blog’s favorite subjects, state business climate.

Location Matters: A Comparative Analysis of State Tax Costs on Business compares the states’ business tax structure as they affect two types of companies — “mature firms,” companies 10 years or older, and “new firms,” younger than three years old.

You can probably guess from the headline (my effort to write headlines based on Chicago songs) where Wisconsin ranks — 35th for “mature firms” and fourth for “new firms.” The difference is that, as the study puts it, “Mature firms are typically no longer eligible for any tax incentive programs while the new facility would be eligible for most incentives.”

The study compares the states’ business taxes as of April 1. That date is three months before this state’s 2011–13 state budget became law. The 2011–13 budget included a small number of business tax improvements, but not nearly enough of them.

The Tax Foundation expands on its new vs. old company rankings by ranking the tax climate for mature and new corporate headquarters, R&D facilities and retail stores in metropolitan areas the size of Milwaukee, along with call centers, distribution centers, and capital- and labor-intensive manufacturing firms in metropolitan areas the size of Eau Claire. The study concludes that corporate headquarters, R&D facilities and retail stores are more likely to be found in Milwaukee-size areas, where call centers, distribution centers and manufacturers are more likely to be found in Eau Claire-size communities. (For instance, there is Convergys in Appleton, ShopKo’s distribution center is in De Pere, and Northeast Wisconsin is full of fire truck manufacturers.) Taxes measured include corporate net income taxes, gross receipts and franchise taxes, property taxes, unemployment insurance taxes, and sales taxes on “business equipment, machinery and inputs.”

For mature firms, Wisconsin ranks 38th for corporate headquarters, 16th for R&D facilities, 37th for retail stores, 19th for call centers, 34th for distribution centers, 42nd for capital-intensive manufacturing, and 39th for labor-intensive manufacturing. For new companies, Wisconsin ranks third for corporate headquarters, fourth for R&D facilities, 40th for retail stores, second for call centers, 29th for distribution centers, 14th for capital-intensive manufacturing and sixth for labor-intensive manufacturing.

Explanations for the rankings, from best to worst:

Call centers: “This operation has the lowest income tax costs in the nation due to the state’s generous job and investment tax credits and the sourcing rules that place the operation’s income out of state where the benefits are received. Additionally, the state offers the highest withholding tax rebate in the nation.”

R&D: “The main driver is that this operation has no income tax burden, due to the state’s R&D tax credit and sourcing rules that place much of the operation’s income out of state where the benefits are received. This operation also faces the ninth-lowest sales tax burden in the nation.”

Retail: “The main factor is that this operation faces the ninth-highest property tax burden in the nation, as well as the tenth highest unemployment insurance tax burden.”

Manufacturing: “The main factor is that the income tax burden is seventh-highest in the nation, in part because the state disallows the manufacturing deduction and has a throwback rule on tangible property sales, which exposes all of the operation’s income to in-state tax.”

One of the most surprising revelations is how poorly Wisconsin ranks in manufacturing taxes given how much manufacturing takes place in Wisconsin. The reason may be summed up in three words: “because we can.” State government policy seems to assume that established manufacturers can be heavily taxed because they can’t go anywhere else. People in Janesville, former home of a General Motors plant, and Kenosha, former home of a Chrysler plant, might disagree with that assumption.

The report says this about manufacturing taxes:

The common elements of these 10 highest tax cost states are high corporate income tax burdens and high property tax burdens. All of these states employ a throwback or throwout rule in their apportionment formula and most of them have relatively high corporate income tax rates. …

Many of these states have either high property tax rates on land, buildings, and equipment, or broader property tax bases that include inventories. … There are nine states that tax inventories in addition to land, buildings, and equipment, four of which are represented in this group of uncompetitive states: Arkansas, Mississippi, West Virginia, and Wisconsin.

About Wisconsin’s new-firm rankings, the report says:

Six of the 10 states with the lowest tax burdens for mature firms are also among the 10 states with the lowest tax burdens for new firms. By and large, some of the same factors that lower the tax burdens for mature firms also benefit new firms. These include such things as the lack of an income tax in Wyoming, a low-rate gross receipts tax in Ohio that only taxes in-state sales, or a single-sales factor in Georgia, Louisiana and Nebraska. Indeed, other states such as Wisconsin, Oklahoma, Kentucky, and Arkansas – which were not in the top 10 for mature firms but do rank in the top 10 for new operations – also weight their apportionment factors toward sales.

Why do these states rank well overall for new operations? The other common trait that binds these states is that they tend to be very aggressive with tax incentives for new operations. … Wyoming stands out from the pack because it achieved a top 10 ranking without offering targeted tax incentives. Of course, it could be argued that Wyoming’s greatest “incentive” policy is simply not levying an income tax. …

Arkansas, Kentucky, Oklahoma, and Wisconsin all went from ranking in the middle of the pack for mature firms to ranking in the top 10 states for new firms because of the extent of their tax incentive programs. In each of the seven firm types, Wisconsin and Arkansas in particular are consistently among the most generous states in offering a complete array of tax incentives, from property tax abatements to job credits.

Put the measures together, and one can conclude that this state’s tax structure is good for new firms, but not good for existing firms — sort of a carrot-then-stick approach, or a bait-and-switch approach, as if state government policy is to dangle incentives to get firms here, then tax them to the eyeballs assuming they’d never leave or scale back their Wisconsin operations. The former are able to use such tax incentives as new-job-creation tax credits (which “must generally be considered ‘qualified’ by state officials and only be available to certain types of industries”) and payroll tax rebates, investment tax credits, R&D tax credits, and property tax abatements.

Is that a good approach? The study notes:

While many state officials view tax incentives as a necessary tool in their state’s ability to be competitive, others are beginning to question the cost-benefit of incentives and whether they are fair to mature firms that are paying full freight. Indeed, there is growing animosity among many business owners and executives to the generous tax incentives enjoyed by some of their direct competitors.

Put another way, established businesses are paying for the incentive programs used by new businesses, which could be their potential competitors for customers and employees. It could be seen as the Social Security system in reverse if such programs were financially self-contained. (Communities’ revolving business loan funds operate similarly.) This is related to tax-incentive programs for favored industries, such as “green” energy, and we’ve seen how well that’s worked out the past couple of years. If it’s dangerous to use the tax laws to favor certain industries and not others, it’s also dangerous to use the tax laws to favor certain-age businesses and not others.

A state that has a corporate income tax (a tax on profits) instead of a gross receipts or business activity tax (a tax on business revenue, whether profitable or not) obviously will tax new businesses less than established businesses, because it takes time for new businesses to become profitable. Given that no enterprise survives long if it sends out more money than it takes in, a business that’s been in business more than a decade is probably making money, while a business that’s less than three years old may not be yet, depending on the financial contributions of the owners.

Economists will tell you that employment growth is more often found in new businesses. That makes logical sense; for a business that didn’t exist a year ago, its employment from then until now is infinite if it hires one employee, and employment growth doubles if it hires one more employee the next year. A mature business has probably figured out how many employees it needs to do  business, and without growth, it has little reason to substantially grow its employment. So new business incentive  programs do have a rationale that makes sense behind them.

On the other hand, go to any community, and the largest private-sector employers are among that community’s oldest private-sector employers. Those are the companies that can afford more employee benefits and that make bigger contributions to their communities, whether that means large-scale United Way involvement or their own favorite local causes. So why should tax policy favor new businesses over established businesses?

There is also this reality the study notes:

For the purposes of this study it is assumed that the business bears the entire burden of the tax, which is why the owners are so sensitive to the costs and why states compete to offer tax incentives. Economists, however, typically look at business taxes in terms of who bears the actual economic burden of the tax, not just the legal burden. That is because corporations are simply legal entities, not people per se. In economic terms, the real burden (or incidence) of business taxes is borne by customers through higher prices, workers through lower wages, or owners and shareholders through lower returns on their investment.

Any one of those groups — business customers, workers, and business owners and shareholders — can use the money government siphons off better than government can.

This study’s results are ironic as well given that the same Tax Foundation ranks Wisconsin 43rd in its 2012 State Business Tax Climate Index — 32nd in corporate taxes, 45th in personal income taxes, 16th in sales taxes, 21st in unemployment insurance taxes, and 32nd in property taxes. Location Matters measures only taxes (as well as tax incentives) on business. The State Business Tax Climate Index includes personal income taxes (where Wisconsin ranks worst) and counts them most, in keeping with the large number of sole proprietors, partnerships, subchapter-S corporations and similar corporate entities in which profits and losses flow through to the shareholders. Sales taxes rank second, since sales taxes certainly affect how much product or service someone can buy.

The ultimate measure of business climate is the state’s economy. And Wisconsin ranks poorly in such business-vitality measures as start-ups and incorporations, in-state corporate headquarters, and abysmally in venture capital spending. The state’s residents, which include business owners as well as their employees, have trailed the nation in per capita personal income growth since “Star Wars” and “Saturday Night Fever” were premiering in a movie theater near you. Gov. Scott Walker and the state Legislature have a lot more work to do.

We’re number 43!

The latest evidence that Gov. Scott Walker and the state Legislature haven’t done enough to improve the state’s business climate comes from the Tax Foundation’s 2012 State Business Tax Climate Index.

In 2011, after eight years of Democratic Gov. James Doyle and two years of a Democratic-controlled Legislature, Wisconsin ranked 41st among the 50 states.

In 2012, after a year of Republican Gov. Scott Walker and a Republican-controlled Legislature, Wisconsin ranks 43rd — 32nd in corporate taxes, 45th in personal income taxes, 16th in sales taxes, 21st in unemployment insurance taxes, and  32nd in property taxes.

In the Midwest, Wisconsin trails Indiana (11th), Michigan (18th), Illinois (28th, although the Land of Lincoln dropped 12 spots), Ohio (39th) and Iowa (41st), and leads only Minnesota (45th).

Wisconsin dropped because other states improved their business tax climates. Republicans might argue that the Legislature was too busy repairing the fiscal disaster area in which Doyle and Democrats left the state, but that doesn’t help convince someone sitting in an office figuring out how much doing business in Wisconsin will cost that business to come here.

Why does a state’s business tax environment matter?

It is important to remember that even in our global economy, states’ stiffest and most direct competition often comes from other states. The Department of Labor reports that most mass job relocations are from one U.S. state to another, rather than to an overseas location. Certainly job creation is rapid overseas, as previously underdeveloped nations enter the world economy without facing the second-highest corporate tax rate in the world, as U.S. businesses do. So state lawmakers are right to be concerned about how their states rank in the global competition for jobs and capital, but they need to be more concerned with companies moving from Detroit, MI, to Dayton, OH, rather than from Detroit to New Delhi. This means that state lawmakers must be aware of how their states’ business climates match up to their immediate neighbors and to other states within their regions.

Anecdotes about the impact of state tax systems on business investment are plentiful. In Illinois early last decade, hundreds of millions of dollars of capital investments were delayed when then-Governor Rod Blagojevich proposed a hefty gross receipts tax. Only when the legislature resoundingly defeated the bill did the investment resume. In 2005, California-based Intel decided to build a multi-billion dollar chip-making facility in Arizona due to its favorable corporate income tax system. In 2010 Northrup Grumman chose to move its headquarters to Virginia over Maryland, citing the better business tax climate. Anecdotes such as these reinforce what we know from economic theory: taxes matter to businesses, and those places with the most competitive tax systems will reap the benefits of business-friendly tax climates.

The study counts personal income taxes (where Wisconsin ranks worst) most, in  keeping with the large number of sole proprietors, partnerships,  subchapter-S corporations and similar corporate entities in which profits and losses flow through to the shareholders. Sales taxes rank second, since sales taxes certainly affect how much product or service someone can buy. Corporate income taxes, which are paid by a business’ customers, rank third.

Wisconsin has five income tax brackets, from 4.6 percent to 7.75 percent. Under the maxim that if you want less of something, tax it more, Wisconsin’s official policy appears to be that we don’t want “rich” people, since we tax income of more than $152,740 at 6.75 percent and income of more than $224,210 at 7.75 percent.

Wisconsin bombs on personal income taxes not just because the rates (including the new rate the 2009–10 Legislature foisted on us) are too high:

Meanwhile, states where the tax base is found to cause an unnecessary drag on economic activity are New Jersey, New York, Wisconsin, California, Georgia, Maryland, Minnesota, and Virginia.

Marriage Penalty. A marriage penalty exists when a state’s standard deduction and tax brackets for married taxpayers filing jointly are not double those for single filers. As a result, two singles (if combined) can have a lower tax bill than a married couple filing jointly with the same income. This is discriminatory and has serious business ramifications. The top-earning 20 percent of taxpayers is dominated (85 percent) by married couples. This same 20 percent also has the highest concentration of business owners of all income groups . …

Double Taxation of Capital Income. … The ultimate source of most capital income—interest, dividends and capital gains—is corporate profits. The corporate income tax reduces the level of profits that can eventually be used to generate interest or dividend payments or capital gains. This capital income must then be declared by the receiving individual and taxed. The result is the double taxation of this capital income—first at the corporate level and again on the individual level.

All states with an individual wage income tax score poorly by this criterion. …

The Federal Alternative Minimum Tax (AMT). The Alternative Minimum Tax (AMT) was created in 1969 to ensure that all taxpayers paid some minimum level of taxes every year. Unfortunately, it does so by creating a parallel tax system to the standard individual income tax code. Evidence shows that the AMT is an inefficient way to prevent tax deductions and credits from totally eliminating tax liability. As such, states that have mimicked the federal AMT put themselves at a competitive disadvantage through needless tax complexity. Nine states score poorly for having an AMT on individuals: California, Colorado, Connecticut, Iowa, Maine, Minnesota, Nebraska, New
York, and Wisconsin.

Wisconsin’s personal income tax penalizes married couples and taxes investment income. (See previous maxim about getting less of something by taxing it more.)

The fact the state has a flat corporate income tax rate is good. The fact that the corporate income tax rate is 7.9 percent is bad. Three states — Nevada, South Dakota and Wyoming — have the correct corporate income tax rate: Zero. And when there are no corporate income taxes (or substitutes such as gross receipts taxes), there is no need for job, R&D, investment or any other tax credits. Nor are there issues about what’s deductible from corporate income taxes, or carrybacks or carryforwards. Nor is there any legislative lobbying over corporate income tax provisions.

The state’s sales tax rate of 5 percent is lower than our neighbors, until a future Legislature increases the sales tax for education, as if more school spending means better schools. (The only thing preventing the sales tax from being extended to groceries is the likelihood of legislators’ surviving the day they vote for that.) There also have been proposals to extend the sales tax to professional services that are not currently taxable; those proposals never include words like “and then reduce the sales tax rate,” of course. The state has high gas and diesel taxes, though no longer the highest since automatic indexing of fuel taxes ended, and at least we don’t also pay sales taxes on gas and diesel.

The one state tax that could be considered low is the alcohol tax — 6 cents per gallon of beer and $3.25 per gallon of liquor — until, that is, the anti-alcohol scolds succeed in getting a future Legislature to raise alcohol taxes because alcohol makes people do dumb things. (That’s the same rationale as banning guns because guns kill people.)

As I’ve written here before, taxes are one component — arguably the most important component, but not the only component — of a state’s business climate. Of course, overregulation inevitably shows up in taxes too, because regulations take government employees to enforce, and employees and what supports government employees (office space, computers, etc.) cost money. The only thing state government spends more money on than employees is shared revenues to the state’s 3,120 units of government.

So how should the Legislature improve the state’s business tax climate? The Tax Foundation has two guiding principles:

1. Taxes matter to business. Business taxes affect business decisions, job creation and retention, plant location, competitiveness, the transparency of the tax system, and the long-term health of a state’s economy. Most importantly, taxes diminish profits. If taxes take a larger portion of profits, that cost is passed along to either consumers (through higher prices), employees (through lower wages or fewer jobs), or shareholders (through lower dividends or share value). Thus a state with lower tax costs will be more attractive to business investment, and more likely to experience economic growth.

2. States do not enact tax changes (increases or cuts) in a vacuum. Every tax law will in some way change a state’s competitive position relative to its immediate neighbors, its geographic region, and even globally. Ultimately it will affect the state’s national standing as a place to live and to do business. Entrepreneurial states can take advantage of the tax increases of their neighbors to lure businesses out of high-tax states.

In reality, tax-induced economic distortions are a fact of life, so a more realistic goal is to maximize the occasions when businesses and individuals are guided by business principles and minimize those cases where economic decisions are influenced, micromanaged, or even dictated by a tax system. The more riddled a tax system is with politically motivated preferences, the less likely it is that business decisions will be made in response to market forces.

That first point — taxes diminish profits — gets to the core of a business, and in fact so-called “nonprofits” as well. Nothing happens unless there’s more money coming in than going out. No business or organization that has more money going out than coming in has much of a future.

If this makes you wonder about the Legislature’s priorities, it should. Walker seems likely to survive his recall attempt, but Republican state senators may not. If the Senate switches sides, that will end any chance of tax cuts, since we know that Democrats have already proposed business tax increases as part of their proposal to reduce government waste, fraud and abuse.

The Legislature needs to eliminate corporate income taxes (and not replace them with something worse, such as gross receipts taxes) and reduce personal income taxes, both in rate and in ending the marriage penalty and investment taxation. If that means, as inconceivable in the People’s Republic of Wisconsin as it may seem, cutting government spending (instead of crowing about how government spending increased by only 1 percent), then that is what’s required. Holding the line on property taxes was fine, except that property taxes are relatively low for manufacturers, thanks to the Manufacturing & Equipment exemption (signed into law by Gov. Patrick Lucey, Wisconsin’s last pro-business Democrat). Holding the line on other business taxes, particularly the sales tax, should go without saying.

Business tax climate is less about the businesses in Wisconsin now than it is about the businesses that may, or may not, decide to locate in Wisconsin. It could be argued that businesses now in Wisconsin have reconciled themselves to the state’s crappy tax climate. (Except, of course, for those that decide to leave Wisconsin.) But Wisconsin trails the nation in such measures of business vitality as start-ups and incorporations, venture capital and, for nearly three and a half decades, per capita personal income growth. Wisconsin also is a leader, if you want to call it that, in business corporate headquarters leaving the state, beginning with Kimberly–Clark’s headquarters departure for Texas in the 1980s.

That previous paragraph means that if you want to see the bad business trends reversed and as a result see more private-sector jobs in Wisconsin (because private-sector jobs are the only jobs that count from a macroeconomic perspective), you need to improve the environment into one where business will not be penalized by government by onerous taxation. The word “Wisconsin” does not mean “onerous taxation” in either an American Indian language or in French, but it should.

We’re number 40!

Forbes magazine released its annual listing of the Best States for Business and Careers.

Wisconsin ranked 40th. That is an improvement from last year’s ranking, 43rd.

In the Midwest, Wisconsin trailed Iowa (1oth), Minnesota (15th), Missouri (31st), Indiana (34th) and Ohio (38th), and led Illinois (41st) and Michigan (47th). Utah ranked first and Maine ranked worst.

Business climate is a favorite subject of this blog. Whether a state is a good place to do business, or not, is important only to the 85 percent of Wisconsinites who do not work for government, because, particularly in an era in which businesses are more mobile than ever before, business climate affects people’s ability not just to get jobs, but to get better jobs and earn more income. There has been some improvement in some rankings (24th according to Chief Executive, and 25th in CNBC’s America’s Top States for Business 2011), but Forbes’ 40th ranking is closer to Development Counsellors International’s 38th ranking than Chief Executive’s or CNBC’s rankings. And any politician who thinks being a C state (Ball State University Center for Business Research) is sufficient should be fired by the voters at the first electoral opportunity.

Business climate rankings compare the states on the factors businesses use in deciding where to open new facilities or close existing facilities, as well as how businesses’ employees are doing, since if a business does well, its employees do well. Business climate rankings are therefore a measure of the success of both short-term legislative efforts to improve and long-term trends affecting a state’s portion of the national economy. Each ranking measures and weights different criteria, although there are several common measures. The key is to look at all the current rankings, not just one, to notice trends. To rank 24th and 25th is better than to rank, respectively, 41st and 29th, but to rank 38th and 40th and get a C grade is simply not good enough.

Forbes’ rankings are based on business costs (including labor, energy and taxes), labor supply (high school and college degrees, net inmigration over the past five years and projected population growth over the next five years), the regulatory environment (which includes Pollina Corporate Real Estate’s measure of business tax incentives and economic development efforts), a state’s economic climate (the past five years of job, income and gross state product growth, unemployment from 2005 to this year and the number of large publicly traded and privately owned companies in the state) and growth prospects (five-year forecasts of job, income and gross state product growth, U.S. Small Business Administration business startup and closing statistics, and venture capital spending), and quality of life (poverty and crime rankings, cost of living, school test performance, culture and recreational opportunities, the number of top-ranked colleges in Forbes’ top colleges listing, and the weather).

Quality of life was the only place where Wisconsin ranked in the top 10 (eighth, to be exact.) Wisconsin ranked 34th in business costs, 39th in labor supply, 35th in regulatory environment, 35th in economic climate, and 31st in growth prospects.

The worst statistic is Wisconsin’s growth in gross state product from 2005 to 2010: 0.2 percent, which compares unfavorably to the country’s Gross Domestic Product growth from 2005 to 2010: 6.8 percent. Anemic GSP growth would be the legacy of Gov. James Doyle and the Legislature of the late 00s, which featured a Democrat-controlled Senate and control of the Assembly split between Republicans and Democrats.

Forbes’ and other comparisons show that taxes are important, but taxes are not the only criterion affecting business climate. (For one thing, Wisconsin ranked fourth in state and local business tax competitiveness according to the Council on State Taxation, but that was before the 2009–10 Legislature raised taxes by $2.1 billion.) As of 2010 (and there’s no indication it’s any better now), Wisconsin continued to rank as a regulatory hell. As of 2010, there is no indication that the Doyle administration’s effort to push regional economic development efforts, such as the New North, has made the state’s economy noticeably better. And Wisconsin’s ranking in venture capital continues to be abysmal, which should give pause to those who condemn legislative efforts to promote venture capital.

Forbes previously did a top-10 ranking of the Best States for Jobs. As you might expect from a bottom-quarter state in business climate, Wisconsin isn’t on the top-10 jobs list. Forbes’ story demonstrates what states that are top-10 in job prospects do right, starting with the number one state, Texas:

Texas offers a low tax, business friendly climate with a surging population that offers a nearly unlimited supply of young labor. Texas ranks sixth in our look at the Best States for Business and Careers. The state has aggressively courted companies to come to Texas to take advantage of these attributes. “Everyone is singing from the same hymn book at the Austin Chamber of Commerce,” says Moody’s Analytics chief economist Mark Zandi. …

The state uses its Texas Enterprise Fund to sweeten economic development deals for companies that are looking to relocate or expand. General Electric, eBay, Electronic Arts, 3M and TD Ameritrade have all announced expansion plans this year with help from the Texas Enterprise Fund. …

Most of the states expecting strong job gains have one thing in common: all but two (New Mexico and Oregon) are right-to-work states. These states give employees the right to decide if they want to join a union or not. There are 22 right-to-work states.

Economist Arthur Laffer pulled together economic data on states as part of a new book, Eureka! How to Fix California, being published in February by California think tank Pacific Research Institute. Laffer found that in the past decade right-to-work states outperformed their union-shop counterparts in almost every metric. Gross state product growth was 53% versus 42%. Personal incomes rose 50% compared to 39% for union states. Job growth was 2.8 % versus -1.3% and the population increase was 12% opposed to 6%.

Companies are increasingly shunning union-shop states.

That last sentence is certainly inconvenient for a state where, as we’ve seen during Recallarama, unions are as strong as they are in this state. Cars and engines, built by United Auto Workers members, used to be constructed in this state. UAW abuses led to the bankruptcies of Wisconsin’s two car manufacturers, GM and Chrysler. And now the numbers of car and engine manufacturers in Wisconsin equal the contribution of unions to the state’s business climate: Zero.

Democrats’ general reaction to business climate rankings is to rhetorically shoot the messenger. Sen. Robert Jauch (D–Poplar) once called those who called attention to Wisconsin’s poor business climate “traitors.” (One would think that term would apply more appropriately to those who flee the state to prevent a vote, which included Jauch, but never mind.) The common general theme of the business climate comparisons is that those states that tax as much, regulate as onerously and fund government as large as they can politically get away with are the states that economically underperform. Since taxing as much, regulating as onerously and funding government as large as they can get away with are the three main planks of the Wisconsin Democratic Party platform, you can understand why Democrats don’t like their policy failures publicly exposed.

But if the economy of this state was doing well compared to other states even in this current national economy, 2010 voters wouldn’t have had several economic development studies to choose from that came to the same conclusion — that Wisconsin’s economy wasn’t doing well regardless of how it’s measured. (The most damning of the studies, the Wisconsin Policy Research Institute’s Refocus Wisconsin, noted that Wisconsin per-capita personal income growth has trailed the national average since the late 1970s.) Even Democratic gubernatorial candidate Tom Barrett didn’t attempt to defend his would-be predecessor’s economic record.

Given the timeline of the Forbes business climate comparison, it’s clear that the blame for the poor rankings lies with the Doyle administration and those in the Legislature (Democrats and Republicans) during the ’00s. That does not take the Walker administration off the hook at all. Creating the Wisconsin Economic Development Corp. to replace the (ineffective) economic development efforts of the state Department of Commerce was a positive step, but only a step. Reducing the net cost of government employees to taxpayers by making them pay more for their benefits was a positive step, but only a step.

It’s clear that Walker wasn’t aggressive enough — and needs to be more aggressive after he survives the stupid recall attempt — in reducing the size and scope of government and improving the state’s business climate. Something is clearly wrong when the state has spent far more than the per capita national average for decades on education without improvement in Wisconsinites’ incomes. Walker has done nothing to neuter the bureaucrats who have given this state a deserved reputation as a regulatory hell, and nothing to reduce the cost of government reflected in the 3,120 units of government in this state. Every dollar of taxes on business reduces a business’ ability to pay its employees, reinvest in itself, or provide dividends to its owners (which include half the households in the U.S.). Every dollar of taxes on individuals reduces an individual’s ability to spend money on the necessities or luxuries of life, both of which are reflected in economic statistics.

You cannot expect to meet job creation goals in a bad business climate. You also cannot expect to have solvent government finances in a bad business climate. And you cannot people to move into, or stay in, Wisconsin with a bad business climate.

 

We’re number 38!

The latest example that the state has a long way to go to a competitive business climate (a favorite subject on this blog, as you know) came last week.

Development Counsellors International rated Wisconsin 38th in “A View from Corporate America: Winning Strategies in Economic Development Marketing,” a triennial survey of corporate site selection executives, the people who decide where a business decides to place a new location.

The top five were Texas, North Carolina, South Carolina, Tennessee and Florida. Those states have a few things in common that Wisconsin apparently doesn’t have, or at least didn’t have when the survey was conducted last year:

Among those who named Texas as having a favorable business climate, the factors mentioned most frequently were: tax climate (44%); pro-business climate (31%) and economic development support/incentives (15%).

Among those who named North Carolina as having a favorable business climate, the factors mentioned most frequently were: low cost (29%); pro-business climate (22%); and strong workforce/talent (22%).

The top reasons provided by those who named South Carolina included low cost (27%); right to work state (23%) and pro-business climate (20%).

The reasons given in 2011 emphasize costs, taxes and incentive offerings. In 2008, workforce was of greater importance.

That is hardly surprising. It is an example of how markets work. When the economy is going well, businesses have to get more creative in getting employees, but states can be less aggressive in attracting businesses. The opposite is the case in bad economic times — employees have to get more creative to find jobs, and states have to become more aggressive in attracting businesses.

Wisconsin is not in the top five, but at least it isn’t in the bottom five — Michigan, New Jersey, Illinois, New York and California. As with the top five, the bottom five also are consistent:

California was cited for having high taxes by 40% of respondents, while 36% mention too much regulation, 23% said high cost and 17% said anti-business climate. Among those who named New York as having a least favorable business climate, 61% cited taxes, 38% said costs, 19% said regulations and 11% said antibusiness climate. Taxes (especially corporate taxes) (49%), fiscal problems/state budget deficits (22%) and costs (20%) earned Illinois a position in this list.

You’ll note that after eight years of the Doyle misAdministration and two years of a Democrat-controlled Legislature, Wisconsin was closer to worst than first. (Of the survey respondents, 2.5 percent put Wisconsin among the “Most Favorable Business Climate Rankings,” and 4.1 percent put the state on the “Least Favorable Business Climate Rankings” list.) Which description as applied to business applied more to Wisconsin as of last year: Low business taxes or high business taxes? Pro-business climate or anti-business climate? “Fiscal problems/state budget deficits”? (Which remain a problem.) “Too much regulation”?

The survey also rated state and regional economic development organizations. Not one from Wisconsin was on either list; the state list included the Texas Governor’s Office of Economic Development, the North Carolina Department of Commerce. (The regional list included the Austin Chamber of Commerce. Austin, Texas, is thought to be like Madison but with hotter weather. But apparently Austin, Texas is more interested in economic development outside state government and the state university than Madison.)

The Wisconsin Reporter, the only Wisconsin media I’ve seen reporting on this latest poor business climate comparison, put some spin on the DCI report:

A new survey ranking the Badger State as not having the most business friendly climate was conducted before Gov. Scott Walker and the GOP-led Legislature’s pro-business laws took effect.

And economic development leaders say the Walker administration is sending the message that times are changing in Wisconsin. …

The 2011 survey was conducted before legislation, such as tort reform and income-tax incentives for businesses that come to Wisconsin, went into effect.

Walker campaigned on a pledge to create 250,000 private-sector jobs during his first term and has made “Wisconsin Is Open for Business” his administration’s slogan.

The Walker administration often points to a recent study by “Chief Executive” magazine as proof that business leaders’ opinions of Wisconsin are changing. In the national survey, CEOs ranked Wisconsin the 24th best state for business, up from 41st in 2010.

The Walker administration has taken some correct steps. Replacing the Wisconsin Department of Commerce, which did more to harass commerce than promote commerce, with the Wisconsin Economic Development Corp. is a positive step.

It’s also clear, though, that the legislation of earlier this year hasn’t gone far enough. Nothing the Legislature approved did anything to curb the Department of Natural Resources, which has earned a nationwide reputation for making it as difficult as possible to do business in Wisconsin. The Wisconsin Reporter quotes Steven Sobiek, the City of Columbus’ director of economic development and energy sustainability, as saying that “My strong sense is that …. we are just not competing as effectively as a state as we could be against other states. That means marketing. That means giving local municipalities tools.”

Sobiek suggests “using revenue from a local sales tax for an economic development fund to encourage business development,” similar to the 0.5-percent Fond du Lac County sales tax that is funding the Mercury Marine retention package. If local officials had better records of thriftiness with the tax dollars they now have, I might be more convinced, but raising local taxes to wave goodies at business looks from here like a local variation of the Doyle Administration’s economic development strategy, such as it was. And you know how well that turned out.

The Wisconsin Reporter’s opposing view came from Sally Simpson, a member of the Kenosha County Democratic Party board, who said perhaps what she didn’t intend to say about “the turmoil” over public employee collective bargaining of earlier this year: “I think the business person sitting at home, wherever he is, (is) asking, ‘Do I want to bring my company into a state like that?’ They get offers to go everywhere.”

If Simpson — a retired teacher and not an expert on economic development — actually meant to say that business owners watch TV coverage of union thugs harassing taxpayers, elected officials and actually productive people, and then ask “Do I want to bring my company into a state like that?”, then she may be right. And thus the public employee unions and their apparatchiks in the Democratic Party and elsewhere are directly responsible for Wisconsin’s rotten business climate.

The Wisconsin Reporter adds this gem: “Democrats accuse the GOP agenda of being too cozy with business, at the expense of the state’s workers.” Given how crappily Democrats ran the state in the 2009–10 Legislature, and the voters’ reaction to same last Nov. 2, by rights Democrats should have forfeited the right to any opinion about economic development.

What comes out of this week’s Legislature special session on jobs may or may not improve the state’s business climate more. That may be up to Sen. Dale Schultz (R–Richland Center), who is viewed, rightly or not, as the squishiest Republican in the one-vote-majority Senate. The issue of venture capital, the lack of which has  hampered high-tech and other businesses in this state, has yet to be dealt with given the reluctance of the Legislature (rightly or not) to create a venture capital fund.

If the Legislature is looking at legislation to pass in the jobs special session, here’s a list from earlier this year from listeners of Jay Weber of WISN radio in Milwaukee that haven’t been passed by the Legislature:

5. Repeal combined reporting
8. Bring back TABOR or some taxpayer bill of rights.
9. End the minimum markup law
15. Create a rainy day fund from excess or unexpected  revenues that pour into the state coffers during boom times. (only talk of this so far, so far as I know)
16. Eliminate the  state income tax on retiree pensions to help keep them in Wisconsin.
17. Freeze the property taxes of retirees to keep retirees in Wisconsin.
24. End early retirement for public employees, so they can no longer live off of a state pension longer than they ever worked at the job.
41. Review and repeal the so-called ‘smart growth’ environmental requirements and restrictions, which have hit the point of absurdity.
The DCI rankings, and for that matter the improved CNBC and Chief Executive magazine rankings show Wisconsin has a long way to go to become a great state in which to do business.