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Home / Washington Business - November/December 2004 / Dick Davis Column: National “Experts” Get it Wrong - State’s Business Climate Not That Rosy |
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Dick Davis Column: National “Experts” Get it Wrong - State’s Business Climate Not That Rosy |
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Written On: November/December 2004 |
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A couple of national organizations recently announced that Washington’s business climate ranks among the nation’s best.
What a relief! Or it would be if the national experts — the Tax Foundation (TF) and the Small Business & Entrepreneurship Council (SBEC) — were correct. Unfortunately, they got it wrong. Both groups mishandle our B&O tax and assign excessive weight to corporate and personal income taxes.
Businesses in Washington state continue to pay 54 percent of state and local taxes, including a B&O tax on gross receipts regardless of profitability. Retailers contend with a high sales tax that drives consumers to neighboring states and the Internet. Rising unemployment insurance taxes and workers’ compensation costs burden all employers, as does a regulatory mess that the Washington Competitiveness Council said “has greatly impacted the ability of business to develop in Washington state.”
So, how’d we get to be the best? Consider each of the recent reports.
Small Business Survival Index
Of the 23 factors used to create the SBEC Small Business Survival Index, 13 involve taxes, seven of them specific to corporate and personal income taxes. (SBEC notes that most small businesses — like partnerships and sole proprietors — file as individuals, paying personal rather than corporate income taxes.) The SBEC adds up all the scores (often just the top tax rates) to come up with the index. Lower is better. And Washington gets a zero on the seven factors tied to income taxes. No wonder we look good.
Sales, gross receipts and excise taxes are combined in a single factor, measured as a percentage of state personal income. So the Washington B&O tax gets rolled up with the sales tax, and we receive the nation’s highest score, 5.67. Remember, SBEC just adds up the numbers. With income tax rates ranging up to 9.9, the scoring method seriously diminishes the importance of our major business tax. Replacing B&O revenues with a corporate income tax would require a tax rate of 15 percent. Scoring us that way would drop us from fourth in the nation to the middle of the pack.
The SBEC considers other factors, like Internet access taxes, right-to-work laws, utility costs, and unemployment taxes, but the effort they put into it is token. Their workers’ compensation factor relies on the useless Oregon premium comparison study. Their single regulatory factor has minimal impact on the rankings, penalizing states one point for failing to adopt “regulatory flexibility” legislation.
To SBEC, small business survival is all about income taxes. Unsurprisingly, the five most “business friendly” states have no personal income tax.
State Business Tax Climate
The Tax Foundation presents a similarly flawed gauge of this state’s tax competitiveness. The Foundation considers four sets of taxes — corporate income, individual income, sales and gross receipts, and unemployment — and something called “fiscal balance,” which rewards states with low taxes and tough tax and spending limits. No property tax measure. They make it complicated, and get it wrong.
Again, Washington’s B&O tax shows up in the sales and gross receipts category, where we receive the worst ranking. Because our state has neither a personal nor corporate income tax, we score a perfect ten (here, high is good) on two of the five measures. Moving the B&O to the corporate tax index would have knocked us out of ninth place back to the middle, or lower.
As you’d expect, all seven states without a personal income tax make it into the top ten “best business tax climates.”
Imagine a musical competition where all contestants compete in four events: Solo performance, scales and arpeggios, technical facility, and sight-reading. Then say that French horn players automatically receive the maximum score in three events because of the difficulty and beauty of the instrument. Lousy horn players would routinely receive better scores than excellent trumpeters or clarinetists. That wouldn’t make them better musicians, just the lucky beneficiaries of rigged competition. And any one who listened would know it.
Scoring Matters
It’s the same with these rigged reports. Anyone who looks closely at our state knows there are problems. And unless we acknowledge them, we can’t fix them.
The Washington Alliance for a Competitive Economy resists efforts to create a 50-state business climate index. It cannot be done well. The factors contributing to success vary among industries. A state’s economic competitiveness depends on how it handles the microclimates relevant to individual industries. Labor costs and energy prices will be important to some firms; access to a great research university will matter more to others. Tax policy affects firms differently, depending on profit margins, the availability of credits and exemptions, and the nature of the competitive environment.
The Tax Foundation and SBEC fall into a common trap: When you can't measure what you want to measure (business climate), you measure what you can (tax rates). Their results are misleading at best. At worst, they’ll distract policy-makers from doing the important work necessary to sustain and strengthen this state’s fragile recovery. We cannot allow that.
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