Businesses start in locations either where the founder lives, or where there is an essential element (or elements) in that locale that facilitates the enterprise. Labor force (and the comparative cost), raw materials, transportation, demand, and access to buyers are some of the major factors. There are others.
When a business relocates, however, it is typically for reasons of the best comparative advantage or advantages. A comparative advantage is when a firm can deliver a service or good of the same value at a lower cost. Or because of their location, they can charge higher prices. Firms also relocate when they have a comparative disadvantage in their current location. A comparative disadvantage occurs when a firm cannot be as competitive due to their location. Some examples include comparatively high local wages, uncompetitive shipping costs, distance from customers or high input costs (materials, energy, and real estate).
A growing comparative advantage or comparative disadvantage today is the impact of state and local taxes, or lack thereof, across the country from state-to-state.
Each year, the Tax Foundation ranks all 50 states on their best and least comparative advantages based on state-specific taxes. They rank each state on five taxes:
- Corporate income tax
- Personal income tax
- Retail sales tax
- Unemployment tax
- Property tax
They then weight their results due to the incidence of the individual tax as follows:
So what are the best states, from a tax perspective, most hospitable to business?
First note that simply having very-business friendly taxes does not necessarily guaranty above-average economic growth. Taxes are but one input in the cost equation in doing business. Alaska, for an example, ranks as the fourth best state from a tax perspective in which to do business. Alaska, however, given location and lower oil prices at the present is the only state in the prior 12-months which had a net-loss in jobs.
Many of these states rank high in the ratings (i.e. low in taxes) as they do not have one or more of the five component taxes on which this analysis was based. But that is not true in all of these as Indiana, for example, has every one of the five taxes, but ranks well in each.
In the states not having one-or-more of the five taxes, note that the remaining taxes they have may not rank well at all.
So what are the least hospitable states from a tax perspective?
Again, just because a state has a less-than-desirable tax ranking does not necessarily imply that economic activity is also low ranking. California, which is ranked 48th in business friendliness in the Tax Foundation study, posted the 15th best job growth rate in the prior 12 months. New Jersey, on the other hand, ranked 50th in the tax study and next-to-last in overall job growth percentages in the latest 12 months.
To read (and download) the entire Tax Foundation report, click http://taxfoundation.org/article/2015-state-business-tax-climate-index?mc_cid=2f0869ccc8&mc_eid=c79ab314e3
The Tax Foundation offers a vast array of tax information and analyses ranging from the county level on up. To find out more, click http://taxfoundation.org/
Admittedly, taxes are not the exclusive driver of where businesses operate. They do, however, alter the profitability and competitive landscape for the businesses operating in those locales.
Several decades ago, when working on my PhD I was fortunate to have a class by Dr. Melvin Greenhut titled Theory of the Firm in Economic Space. His specialty was essentially why firms locate where they do. I recall there were four primary factors:
- The community had to have jet service
- The area had to be readily accessible to Interstate Highways
- Rail service was an essential
- It had to be a place where the CEO wanted to live
I believe state tax friendliness or lack-thereof falls into the last category.
If you are involved in the real estate business, I strongly encourage you to peruse the 76 page Tax Foundation report and perhaps share it with clients and customers.
Ted