States with Best Business Tax Climate Grow Fastest

March 05, 2007

This is a letter-to-the-editor I sent to the DesMoines Register in response to columnist Gary Maydew's article To attract businesses, think beyond tax rates.

Gary Maydew may be an excellent accounting professor, but he needs to brush up on his statistics. He ran a simple correlation between the Tax Foundation's ranking of business tax friendly states and the number of privately held firms by state as published by Forbes Magazine to ‘prove' that taxes aren't important to businesses (To attract businesses, think beyond tax rates-- 3/2/07). The problem is that the list of privately held firms is an extremely small set of a portion of total businesses in a state. Some states in the Forbes list don't even have one privately held firm. Mr. Maydew should've known better than to use that list to run a correlation. The State Business Tax Climate Index does not measure the friendliness just for large privately held firms-- it measures it for all firms. There is no theoretical link between tax friendliness and large privately held firms in a state, so it is no surprise Mr. Maydew found a small correlation.

However, states with the most competitive tax climates will grow faster than states with uncompetitive climates. The Tax Foundation has found that states with the best business tax climates have much faster rates of growth than those states with poor climates. In addition, states with the lowest tax burdens have faster rates of growth than those states with higher burdens.

A Tax Foundation commentary about the correlation of good business tax climates and higher growth rates is available here, and the Forbes data Maydew used is available here.

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