Tax Foundation’s State Business Tax Climate Index: Is the “Tax” Silent?

Earlier this week the Tax Foundation released its “2015 State Business Tax Climate Index,” the latest in its annual series purporting to provide a single overall ranking of business tax structures in each of the 50 states. States scoring the best on the Index have one thing in common: there is a major tax, usually the income tax, which other states levy that the “best” states don’t. But the report has two major flaws: the Index itself is constructed in a way that is arbitrary at best, and, more vitally, it essentially pretends that tax revenues aren’t used for any public investment that businesses might find valuable.

As a 2013 report from Good Jobs First explains, the report’s Tax Climate Index is arrived at by separately ranking each of the major taxes levied by state and local governments—including corporate income, personal income, sales and property taxes—and then merging those rankings together in an arbitrary way to create a single mega-ranking. There is, of course, no obviously correct way of weighting the importance of these various taxes, and in fact different types (and sizes) of businesses in any given state will likely have very different opinions of the various taxes they pay. But the single most basic flaw of the Tax Foundation report is clearly stated in its title: it purports to rank “State Business Tax Climate” as a free-standing policy choice.

The folly of this approach can be seen most obviously in two findings of the report. First, the only states receiving a perfect “10” grade on any of their specific taxes are those that simply don’t levy the tax. Alaska gets a “10” for not levying a personal income tax. Nevada and Wyoming are awarded separate “10s” for the lack of personal or corporate income taxes. The obvious implication is that from the perspective of the State Business Tax Climate Index, the perfect business tax system is one that doesn’t tax *anything*.

Of course, this is an utterly irresponsible strategy. Architects of the major tax cut pushed through by North Carolina lawmakers last year—in which the state dramatically cut the personal and corporate income tax—are facing persistent criticism that the cuts were fiscally irresponsible, forcing damaging cuts to the state’s education system and likely creating a longer-term increase in local property taxes to pay for the cuts.
Fallout from these controversial cuts is even spilling over into statewide elections in the Tarheel State this fall. In the world of the State Business Tax Climate Index, however, North Carolina’s 2013 tax changes are cheerfully rung up as “the single largest rank jump in the history of the Index.”

This disconnect exists because (as, again, the Tax Foundation makes quite clear) the report is attempting to evaluate taxes taken on their own, without evaluating the impact taxes have on vital public investments. The problem with the report’s hermetically-sealed look at business taxes is that no policymaker reading the report is going to interpret it that way. The unambiguous message sent by these rankings is simply “you should cut business taxes.” In that important sense, the “Tax” in “State Business Tax Climate Index” is silent—it’s all too easy for readers to interpret this report as a recommendation on how states should improve their business climate, full stop.

Constructing a truly useful business climate index, one which attempted to quantify the impact of the spending cuts forced upon North Carolinians by last year’s tax plan on elements of the state’s infrastructure that businesses depend on, would be a herculean task. But the Tax Foundation’s one-sided approach to this task should not be mistaken for a second-best effort at this goal. At best, the report tells readers which states do the best job of pretending public investments don’t cost anything.