March 2, 2006

Michigan Should Fear Indiana, Not India

(The following article appeared in the March 2, 2006 edition of the Detroit News.)

Michigan lawmakers often wring their hands about jobs being “outsourced” to India and China. But the facts suggest a menace closer to home. Departing jobs are more likely to end up in Indiana rather than India, or to head south, as companies run for cover from Michigan’s punitive business tax climate.

State taxes matter to companies. They’re a cost of doing business, and smart employers aim to minimize them. In today’s increasingly mobile world, low-tax states are lining up to poach companies away from high-tax states.

State taxes matter Tax competition for jobs between states is nothing new. Within America’s 50-state free-trade zone, lawmakers have long known that changes in their state tax codes affect their competitiveness with neighbors.

Unfortunately, when it comes to tax competition, most states get it wrong. The temptation is to bribe big-name employers with short-term tax bonanzas like property tax abatements, tax credits for research or investment, and other special tax breaks.

But this strategy almost always backfires, whether at the state or local level. Consider, as The Detroit News reported Wednesday, that a $115 million package of state tax credits and other incentives couldn’t persuade Ford Motor Co. against closing its Wixom assembly plant.

Short-term tax breaks fail Short-term tax lures are a politically attractive way to appear to “create” jobs, but those expensive giveaways send a damning message about a state’s tax climate.

To new companies, they signal that only special bonuses can make the state’s flawed taxes attractive. And to existing companies, they’re an economic face-slap, treating a state’s economic base of companies as dupes who’ll pick up the tab for newcomers.

There is a better way to preserve jobs over the long run: Identify and fix complex and punitive parts of the state’s tax code, leveling the economic playing field for both new and existing Michigan companies.

The Tax Foundation’s recently released State Business Tax Climate Index grades each state’s “tax-friendliness” to companies. With more than 100 variables and thousands of data inputs, the index gives lawmakers a simple, quantitative way to compare their tax systems to neighboring states.

Michigan not in top 10 Who has the best state tax systems? The 10 best states this year are Wyoming, South Dakota, Alaska, Florida, Nevada, New Hampshire, Texas, Delaware, Montana and Oregon.

Where did Michigan rank? In the middle of the pack overall, with the 26th best tax climate.

The shame of this mediocre grade is that with the exception of its infamous Single Business Tax, Michigan has a very competitive tax system. According to the State Business Tax Climate Index, Michigan has one of the best personal income taxes in the nation. With the exception of those states that don’t tax wages at all, only two states have a personal income tax more hospitable to business growth.

Similarly, Michigan’s wealth-based taxes on property and other assets are better than average, 20th best.

Single Business Tax onerous As for the Single Business Tax, it ranks 49th, imposing a heavier burden on Michigan employers than any other state’s principal business tax except New Jersey’s onerous corporate income tax.

Almost everyone in the state, including both political parties, seems to agree that the Single Business Tax should be repealed or at least cut, but the predictable debate over how to “pay for it” has stopped decisive action.

How many jobs must flee before the state decides the price exacted by the status quo is even higher?

Where the blame lies Michigan employers can’t be blamed for accepting special tax handouts rather than demanding broad-based tax reform. America taxes its corporations at the highest rate in the world — higher than Sweden, Germany and France — so it’s no surprise companies take any tax break they can get.

Instead, the blame falls on lawmakers who relish in handing out high-profile tax preferences that make headlines, rather than fixing deep-seated but often hidden problems in the state’s tax code.

There is a way out. Tell the governor and legislators to stop handing out tax goodies and start repairing Michigan’s tax climate. If you do, the jobs will stay.

Tax Foundation economist Curtis Dubay and Tax Foundation President Scott Hodge are co-authors of the State Business Tax Climate Index.