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Does a Strong Business Climate Translate into Jobs?

October 11, 2013

by Jeff Pinkerton

Kansas and Missouri both have reputations as low-tax states which places them towards the high end of the Tax Foundation’s “2014 State Business Tax Climate Index.” Missouri ranked as the 16th best business tax climate, while Kansas came in at number 20. Wyoming takes the honors as the best business tax climate of any state, followed by South Dakota and Nevada. None of these states have corporate or individual income taxes, and they have burgeoning energy sectors that allow them to lessen other tax burdens.

At the other end of the scale, the states with the least-friendly business climates are New York (50), New Jersey (49) and California (48).

Unfortunately, this inviting business climate has not translated into high employment growth rankings for either Missouri or Kansas. Over the four-year period from August 2009 (roughly the end of the recession) to August 2013 (the most recent data available) Kansas ranks 39th in employment change percent while Missouri ranks 48th. In fact, seven of the 10 states with the least hospitable business climates fared better in employment growth.Climate_Employment_Scatterplot_State_Label

Certainly, taxes are a factor in determining business success. If all else is equal, lower taxes are better than higher taxes; it’s simply a lower business expense. But clearly businesses consider more than just taxes when determining how or where they should expand. It is a matter of value. If a business finds the public goods (infrastructure, education, quality of life) of a particular state beneficial, it may be worth the extra expense of higher taxes.

This is a hot topic in our area right now as Kansas has made the move to improve its business tax climate and Missouri is wrestling with doing the same. The premise seems sound — a better business climate should result in more jobs – but the data show business climate rankings to be only weakly correlated with job growth rankings during the current economic recovery.

State

Overall State Tax Business Climate Index Rank

Employment Change Rank (Percent) August 2009-2012

Wyoming

1

33

South Dakota

2

22

Nevada

3

38

Alaska

4

27

Florida

5

12

Washington

6

11

Montana

7

16

New Hampshire

8

42

Utah

9

3

Indiana

10

4

Texas

11

2

Oregon

12

20

Delaware

13

41

Michigan

14

5

Tennessee

15

8

Missouri

16

48

Mississippi

17

40

Idaho

18

7

Colorado

19

6

Kansas

20

39

Alabama

21

49

Arizona

22

23

West Virginia

23

24

Pennsylvania

24

36

Massachusetts

25

13

Virginia

26

31

Kentucky

27

14

North Dakota

28

1

Maine

29

47

Hawaii

30

17

Illinois

31

34

Georgia

32

18

Louisiana

33

35

Nebraska

34

37

Arkansas

35

46

Oklahoma

36

29

South Carolina

37

15

New Mexico

38

50

Ohio

39

32

Iowa

40

26

Maryland

41

25

Connecticut

42

43

Wisconsin

43

30

North Carolina

44

19

Vermont

45

28

Rhode Island

46

44

Minnesota

47

9

California

48

10

New Jersey

49

45

New York

50

21

Source: Tax Foundation, Bureau of Labor Statistics
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