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Missouri Leads Region in Low Business Taxes but Lags in Employment Growth

January 11, 2012
In recent press release, the Kansas Economic Progress Council calls Missouri the “real tax competitor” in the region due to its low business tax rates. The press release cites a report conducted by the Arkansas Chamber of Commerce which analyzed effective business tax rates in eight states (Arkansas, Kansas, Louisiana, Mississippi, Missouri, Oklahoma, Tennessee and Texas). Missouri had the lowest effective tax rate in five of eight categories the study measured.

On the surface, this looks like good news for Missouri, as low business taxes should allow the state to be more competitive than others in the region in growing and attracting businesses. But is this low-tax strategy really effective?

Presumably, low taxes would lower business costs and enable Missouri firms to charge relatively lower prices, thus increasing the demand for Missouri products. But if so, we would expect this to show up as increased output and employment in Missouri relative to other states. Unfortunately, this has not recently been the case. As the chart below illustrates, Missouri ranked last among the eight states in terms of employment growth over the past year. Employment in Missouri has grown by 1,400 for the year ending November 2011, an increase of 0.1 percent. Louisiana, on the other hand added 46,700 jobs between November 2010 and November 2011 — despite having the highest overall effective tax rate.

Most studies of business relocation find that while relative tax rates play a role, it’s a relatively minor one compared to things like the quality and availability of labor, access to markets, availability of high-quality transportation services and proximity to a cluster of businesses serving similar markets. In other words, just like people, businesses seek value -the quality of service received relative to the price paid – rather than low cost alone.

As the employment growth in higher tax states indicates, at least some growing firms are finding a better “value proposition” in states other than Missouri.

Here is a link to the KEPC press release.

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