Response to Wisconsin Think Tank Criticism of State Business Tax Climate Index

November 10, 2009

The Institute for Wisconin’s Future has issued a report criticizing the Tax Foundation’s State Business Tax Climate Index as a “poison pill” for the state. The Institute falsely claims that the Index suggests budget cuts to education, transportation and health care, but the Index does not evaluate the expenditures side of public policy.

Tax Foundation Staff Economist Kail Padgitt, who authored the 2010 State Business Tax Climate Index, debunks the Institute’s claims and explains the scope and evaluation criteria of the Index:

The State Business Tax Climate Index is designed to measure the business-friendliness of each state’s tax system’s principal features. Statutory tax rates, deductions, exemptions, credits, these are the values that are tallied in the computations. The tax climate is a subset of the broader “business climate” that would have to be judged not only by tax measures but with hundreds of other criteria.

Noticeably absent from the Index is revenue collected, whether measured in dollars or as a percentage of income. The Tax Foundation and hundreds of other groups and scholars author studies that focus on tax revenue and tax burdens, but the Index is not one of those.

Instead, with the Index we are getting at the unseen costs of goods not produced and jobs not created. The more biased and burdensome the tax structure is — as revealed by its statutory language — the larger these costs are. This is what economists refer to as the deadweight loss of taxation. The SBTCI was designed to index these costs.

Read the full commentary responding to criticisms of the State Business Tax Climate Index.

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