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Associated Press Analysis: Taxes Don’t Matter, Competition Among States Bad

3 min readBy: Joseph Bishop-Henchman

Writing on the Illinois tax increases, the Associated Press analysis remarks:

But economic experts scoffed at images of highways packed with moving vans as businesses leave Illinois. Income taxes are just one piece of the puzzle when businesses decide where to locate or expand, they said, and states should be cooperating instead trying to poach jobs from one another.

I think the AP may be overstating its case, as I imagine most experts wouldn’t say that last part. It’s true that businesses won’t run for the exits today. And it’s true that lots of things influence business decisions. But taxes matter and shape decision-making. Virtually every country in the world is lowering corporate income taxes in recognition of this fact. Nearly every state has lowered top individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rates over the last thirty years as competitive pressures heated up. The idea that state taxes don’t matter for decision-making was discredited decades ago.

They quote one economic development official who talks about the benefits of cooperation over competition:

“The idea of competing on state taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rates is . . . hopelessly out of date,” said Ed Morrison, economic policy advisor at the Purdue Center for Regional Development. “It demonstrates that political leadership is really out of step with what the global competitive realities are.”

That’s a bizarre statement to make, since it’s so out-of-touch with reality. Annual reports from the OECD and reports from organizations across the political spectrum admit that governments compete on tax rates and lots of other things: quality of services, good transportation, education level, regulations, even weather. Weaknesses in one are made up by strengths in others. Justice Brandeis famously called the states the laboratories of democracy. Global economic development is a story of countries and states emphasizing their states and competing hard for business expansion, entrepreneurial activity, and job growth.

Perhaps Mr. Morrison meant to refer to zero-sum competition, such as D.C. giving a tax subsidy to one company to move down the road from Montgomery County, Maryland. That probably didn’t boost overall economic well-being; it just shifted it from one jurisdiction to another. But a “welcome mat” business climate open to all takers isn’t a zero sum game. If, say, Indiana, has a good business climate (as they do) and brings over activity that would have been in Illinois and makes it more productive, we’re better off.

Aside from Mr. Morrison’s statement, all the other quotations in the article go against the AP’s thesis that taxes don’t matter and that competition between states is bad. Gov. Quinn talks about how competition for business pushes his state “not to be a fiscal basket case” (as I guess it would prefer to be otherwise?). Train manufacturer Talgo says they’ll factor in the tax increase as they weigh options. Small business owner Bill Ecton says the tax increase will impact hiring. An Illinois senator says it’ll hurt jobs.

There’s lots of room for cooperation between states. Streamlined definitions, rules, and licenses that work across state lines are all great ideas. But a uniform tax system for all 50 states wouldn’t leave us better off. It’d deny the fact that the states have different characters and are endowed with different gifts. We can have the “Massachusetts model” and the “Montana model” and they can both work for different people.