Analysis: Do Business-Friendly Tax Climates Yield The Most Jobs?

Source: Mike Maciag, Governing, By the Numbers blog, October 10, 2013

The Tax Foundation published its annual State Business Tax Climate Index study on Wednesday, ranking the most and least friendly states for companies to do business.

As in years past, the release generated no shortage of media attention. The index serves as a benchmark for comparison and is often cited by elected officials, whether they’re on the campaign trail or looking to lure companies from other states.

In highlighting its rankings, the Tax Foundation calls on lawmakers to improve business tax climates to make their states more competitive.

But do states with higher business tax climate scores actually boast stronger job markets?

While business taxes do factor into the equation to an extent, a review of the most recent economic data shows no correlation between states rated higher and those with better employment indicators. In fact, some of the lowest-ranked states weathered the recession quite well….

…A few of the Tax Foundation’s lowest ranked states are actually among the strongest performing in terms of current employment indicators.

The report singled out Minnesota, for example, because the state enacted policy changes said to have hurt competitiveness, particularly a retroactive individual income tax rate hike. Accordingly, the state fell three slots from last year’s report to the 47th worst in country.

To the contrary, Minnesota’s job market is quite strong. As of August, its unemployment rate stood at 5.1 percent – tenth lowest of any state. Elsewhere, it stacks up even better against other states. Its employment-to-population ratio is 66.7 percent, fourth best nationally….