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.


On the “recovery”

Big Government thinks what President Obama claims to be a recovery isn’t:

The national unemployment rate is now 8.5% (December’s), its lowest level since January 2009, but while some saw this welcome news as something to celebrate, it hides a much darker economic picture: the jobs report vastly undercounts the unemployment rate. Moreover, as of this writing, we don’t know if December’s jobs report is a trend, or if, as some economists predict, economic growth will slow in the first quarter of 2012, forestalling some of the gains made. In November, the unemployment rate fell from 9% to 8.6%, but this was not due to an increase in jobs, but due to a decrease in the numbers of people “actively seeking” them. …

In December 2007, the U.S. economy employed 146 million; today, four years later, it employs 140 million. The population has grown; the number of jobs has declined.

No economy is sustainable under the conditions in those last two sentences.

But wait! There’s more!

Nobel Prize-winning economist Michael Spence and co-author Sandile Hlatshwayo estimate that from 1990 to 2008 all net job creation has been in the “non-tradable sector,” chief among them health care and government jobs. Alas these sectors aren’t known for their productivity and are hardly the jobs that can propel the growth necessary to accommodate a new workforce. The manufacturing jobs which once went to the growing middle class is getting more productive—but with fewer workers and more machines.  In 2009—the height of the recession—productivity in U.S manufacturing increased by 7.7%, more than any other country followed by the Bureau of Labor. America’s share of world manufacturing stood at 20% in 2009, down only 2%.

If America is to beat this recession, it will need new firms, churning out new jobs. Indeed, according to the Kauffman Foundation, America’s leading funder of economic research, since 1980 nearly all net job creation has come from firms that are less than five years old. But since 2007, new firm formation has slowed. The number of new companies formed in 2009 is 27% lower than past years, meaning that companies formed in 2009 employ one million fewer workers than the historic norm.

More skepticism comes from Ace of Spades HQ, commenting on Newt Gingrich:

For me, it was the part where he stood up for work. Where he discussed the essential virtues of work. Nobody does that anymore. It was refreshing. It was important to me to hear someone say it. To hear that someone has a f*cking clue what’s going on down here in Realityland. We are out of work and we want it.

This administration seems to think that Americans should view work as a vampire perceives holy water, and nearly every policy out of DC reflects that.

Well, we don’t think that way. We’re Americans. We want to work. Dammit, we’re ready to get back to it. Give us the reins to our own lives, stick your food stamps back in your ass where they came from, and get out of the way. You’re killing us.

This message resonates. That’s why Gingrich won. Not just the slap at ‘the elites,’ but the content of the slap. The part where all work is good work and no one should consider themselves demeaned by what is *good.* Yeah, that may have been pre-formulated, and Juan Williams walked right into it. So? It needed to be said. Most of us thoroughly enjoyed hearing it clearly and unambiguously elucidated.

Currently, several of my friends and family are out of work, or underemployed. I’ve never seen things this bad in my life. Many of my clients who are technically self-employed simply have had nothing to do for the past three years. They are depleting their savings and selling family heirlooms at auction, while they make pocket cash at a department store to get by.

Meanwhile, the OWS crowd is complaining that no one has coronated them with cushy positions and free stuff the minute they got out of college, and resent the implication that they might have to work some menial jobs for a while until they get their stuff together, the way most everybody else in this country has had to for generations.

This is bad. This is real bad. There’s an ideological rot in this country, eating away at our vitality and encouraging parasitism and sloth. The only reason Obama has gotten away with implementing his job-killing agenda is because a lot of damn people need to get their heads right. Newt Gingrich put his finger on a raw nerve, and was rewarded for it.

And you wonder why most voters think the U.S. is in decline?


Presty the DJ for Jan. 26

The number one single in Great Britain today in 1961 included a Shakespearean reference:

The number one single today in 1965 included Jimmy Page, later of Led Zeppelin, on guitar:

Today in 1970, John Lennon wrote, recorded and mixed a song all in one day, which may have made it an instant song:

The number one British single today in 1973:

The number one British album today in 1985 was Foreigner’s “Agent Provocateur”:

Today in 1986, Allen Collins, who survived the 1977 Lynyrd Skynyrd plane crash that killed two band members, crashed his car, killing his girlfriend and paralyzing him from the waist down.

The number one British single today in 1991:

Today’s birthdays begin with Corky Laing, drummer of Mountain …

… born one year before Derek Holt of the Climax Blues Band, who …

David Briggs of the Little River Band:

Eddie Van Halen:

Norman Hassen played drums for UB40:

Anita Baker:

Andrew Ridgeley of Wham: