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back to index backAMERItalk August,  2005


Grade Deflation: Looking for a U.S. state with a business-friendly climate?

Start with Alabama. It's 8th, 16th, 25th or 46th best, depending on whether you're consulting the Small Business Survival Index, the State Business Tax Climate Index, the Economic Freedom Index or the Competitiveness Index.

Then there's Massachusetts. It's 33rd in the Tax Foundation's State Business Tax Climate Index, and a lowly 41st in both the Pacific Research Institute's Economic Freedom Index and the Small Business and Entrepreneurship Council's Small Business Survival Index. But it ranks first in the Competitiveness Index, compiled by the Beacon Hill Institute at Suffolk University in Boston.

Hometown boosterism? Not necessarily. In a new book, Grading Places: What Do the Business Climate Rankings Really Tell Us?, University of Iowa professor Peter Fisher points out that 34 of the 50 states can brag they placed in the top ten in at least one of the ratings produced by five free-market, anti-tax think tanks. (The fifth set of ratings, the Cato Institute's Fiscal Report Card, looks more narrowly at the performance of individual governors.)

Fisher's book was published by the liberal-leaning Economic Policy Institute. But that doesn't undercut the economist's main point. While all these ratings are "designed to promote a particular, usually anti-tax, political agenda," they don't even produce consistent results, making them of questionable value as a tool for business folks evaluating potential locales.

(A little disclosure here: Fisher is kinder to the annual Forbes Best Places for Business and Careers ratings, which, he says, are "based on many of the factors economists generally consider important in business location decisions." Taxes are taken into account as part of the cost of doing business, but so too are the local population's education level; the cost of living; the crime rate; cultural and leisure amenities; and employment, income and migration trends. The Forbes list does have a bias, he notes, "in favor of skilled labor and white-collar employment." So sue us.)

If, as Fisher argues, the think-tank grades aren't useful to business folks and are mostly ignored by them, why bother to deflate them? Fisher responds that the media and state legislators do pay attention to these lists. And since almost every state does poorly in at least one of the rankings, an argument can always be made for a business-friendlier climate.

The Big 8
State
Small-Business Survival
Index
State Business Tax Climate
Index
Competitive Index (BHI)
Economic Freedom Index
California
50
38
22
49
Florida
5
2
29
22
Illinois
19
23
39
46
Michigan
6
36
24
34
New York
45
49
34
50
Ohio
40
29
43
43
Pennsylvania
12
22
30
45
Texas
11
4
20
17
     
Source: Peter Fisher
     


In fact, the pressure on pols to prove their business-friendly bona fides may contribute to another phenomenon Fisher has studied and been skeptical of: the growing use of special tax breaks and incentives to woo companies.

Here, it's not just professors published by left-leaning think tanks who are raising tough questions. Some free marketers (and competitors to companies getting the breaks) are beginning to challenge not just the wisdom but the legality of the breaks.

Last year, the 6th U.S. Circuit Court of Appeals ruled that a tax credit Ohio and the city of Toledo granted DaimlerChrysler violated the Constitution's commerce clause. Northwest Airlines has had some success with a suit challenging Wisconsin's grant of tax breaks to Air Wisconsin Airlines.

And just last month, the North Carolina Institute for Constitutional Law, headed by a former state Supreme Court justice, filed suit challenging the legality of a $280 million incentive package the state used to lure a Dell plant. According to a report produced by the organization, the state has also recently doled out subsidies to Credit Suisse Group , Merck and Reynolds American .

Source: Forbes.com - GAI


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