States Series: Texas vs. California
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As today brings the opening game of the World Series between the Texas Rangers and the San Francisco Giants, we dedicate a series of posts to a closer look at how the Lone Star State and the Golden State match-up when it comes down to their state finances. (Hint: it won’t take a seven game series to realize who takes the trophy in this contest.)
In this first installment we examine business friendliness.
Yesterday, the Tax Foundation released its annual State Business Tax Climate Index, which measures how different states’ tax systems compare. The rankings take into consideration five major components: the corporate tax index, the individual income tax index, the sales tax index, the unemployment tax index, and the property tax index. The higher the state ranks, the more business friendly the state’s tax system is, encouraging more investment in the state and creating more jobs for residents. The Tax Foundation puts it in perspective:
Certainly job creation is rapid overseas, as previously underdeveloped nations enter the world economy. So state lawmakers are right to be concerned about how their states rank in the global competition for jobs and capital, but they need to be more concerned with companies moving from Detroit, MI, to Dayton, OH, rather than from Detroit to New Delhi. This means that state lawmakers must be aware of how their states’ business climates match up to their immediate neighbors and to other states within their regions.
In the latest rankings Texas comes in at #13 and California ends up in the penultimate spot at #49. Of the five major components, the greatest weight is given to the individual income tax index. Examining this index, we see that Texas is among only seven states with no individual income tax. This is significant as “a number of businesses, including sole proprietorships, partnerships and S-corporations, report their income through the individual income tax code.” Furthermore, “taxes can have a significant impact on an individual’s decision to become a self-employed entrepreneur.”
It is in the best interest of states to form their tax codes to make them more business friendly and attract more investment in the state’s economy. To this end, the Tax Foundation lays out two important rules for lawmakers to keep in mind as they consider relevant matters:
Taxes matter to business. Business taxes affect business decisions, job creation and retention, plant location, competitiveness, the transparency of the tax system, and the long-term health of a state’s economy. Most importantly, taxes diminish profits. If taxes take a larger portion of profits, that cost is passed along to either consumers (through higher prices), workers (through lower wages or fewer jobs), or shareholders (through lower dividends or share value). Thus a state with lower tax costs will be more attractive to business investment, and more likely to experience economic growth.
States do not enact tax changes (increases or cuts) in a vacuum. Every tax law will in some way change a state’s competitive position relative to its immediate neighbors, its geographic region, and even globally. Ultimately it will affect the state’s national standing as a place to live and to do business. Entrepreneurial states can take advantage of the tax increases of their neighbors to lure businesses out of high-tax states.