State Tax Burden Comparisons

The following article appeared in Dome Magazine (July 2009). It is a very interesting comparison and argument on why the tax load or burden in each state is may not relevant to a lot of debates about economic development, job placement or tax increases/cuts. We all need to understand this before we make major reforms in Michigan's tax structure so that we can compete in this century and also so we can begin to get at intelligent choices in balancing our state budget--not to mention stopping the red ink from flowing. Read on:

by Lou GlazerJuly 10, 2009
In all of the five different tax rankings of the states that have been released recently, Michigan places in the middle. But each brings calls for Michigan to cut taxes so that it can be one of the lowest tax states in the country — the assumption being that the states with the lowest business taxes have the best economies.
There’s one problem with that assumption. It isn’t true!
The top-ranked states are not, by and large, the most prosperous states. This is true whether the focus is on overall state and local taxes, business taxes or even a broader measure of faithfulness to conservative economic policies. What these ranking clearly demonstrate is that low taxes are not a reliable path to high prosperity.
Two of the rankings — released by the Senate Fiscal Agency — using data from the statistical agencies of the federal government measure overall state and local total tax burden. On a per capita basis of the 10 lowest tax states, none is above the national average in per capita income. On a percent of personal income basis, only three of the 10 lowest tax states are above the national average in per capita income.
Overall tax burden is so irrelevant to prosperity that eight of the lowest per capita income tax states are also in the bottom 20 in per capita income. And of the lowest overall tax states based on percent of personal income, four are in the bottom 20 in per capita income.
Two of the rankings measure combined state and local business taxes. The East Lansing-based Anderson Economic Group LLC (AEG) ranks states on business taxes as a share of profits. Only three of their 10 lowest business tax states were above the national average in per capita income. Five are in the bottom 20.
The Senate Fiscal Agency also released a ranking of state and local business tax burden as a percentage of private gross state product using data from Ernst & Young. Unlike the AEG report, this report measures Michigan with the new MBT, including the surcharge. Michigan ranks 22nd. So even with the much reviled MBT with a surcharge, Michigan is not a high business tax state!
Because of a tie there are 11 states in their ranking of the lowest 10 business tax states. Six of them are above the national average in per capita income. But once again, business tax burden is so unreliable as a path to high prosperity that four of their low-tax 10 are also in the bottom 20 in per capita income.
Finally, the Senate Finance Committee recently heard testimony from the American Legislative Exchange Council (ALEC) on their Rich States, Poor States report. It ranks states on their fidelity to ALEC’s conservative economic policy agenda — a combination of low taxes, less government spending and regulation, and weak unions. It then claims that the states that most faithfully follow their policy agenda have the best economies.
Once again, not true. Of their top 10 states, only four are above the national average in per capita income. Four are in the bottom 20 in per capita income.
So if low taxes are unreliable in determining which states are rich and which are poor, what does predict prosperity? The most reliable indicator is college education attainment. In our work at Michigan Future, Inc. we have found that, by far, the best predictor of a state’s prosperity is the proportion of adults with a four-year degree or more.
The power of college attainment as a predictor of prosperity can be seen when you look at the top 10 states in proportion of adults with a four-year degree. Nine are above the national average in per capita income — all are in the top 12 and none is in the bottom 20.
Clearly, the states with the highest college attainment are more prosperous than those with the lowest overall or business taxes. The ranking that matters most to our future prosperity is that Michigan is 34th in the proportion of adults with a four-year degree.
A prosperous Michigan depends most on preparing, retaining and attracting talent. That’s what policy makers and candidates should be debating. Because if we don’t get better educated, we will be a poor state.
Lou Glazer is president of Michigan Future Inc., an Ann Arbor think tank that focuses on how the state can succeed in a knowledge-based economy.