September 2009, Number 59
2010 State Business Tax Climate Index
Kail M. Padgitt
The Tax Foundation presents the 2010 StateBusiness Tax Climate Index (hereafter theSBTCI or the Index) as a tool for lawmakers,businesses and individuals alike to gauge how their states’ tax systems compare.Policymakers can use the SBTCI to pinpointchanges to their tax systems that will explicitly improve their states’ standing in relation tocompeting states. American companies often function at acompetitive disadvantage in the globaleconomy. They pay one of the highestcorporate tax rates of any of the industrializedcountries. The top federal rate on corporateincome is 35 percent, and states with punitivetax systems cause companies to be even lesscompetitive globally.The modern market is characterized by mobile capital and labor. Therefore, compa-nies will locate where they have the greatestcompetitive advantage. States with the besttax systems will be the most competitive inattracting new businesses and most effective atgenerating economic and employmentgrowth. Although the market is now global, theDepartment of Labor reports that most mass job relocations are from one U.S. state toanother rather than to an overseas location.
Certainly job creation is rapid overseas, aspreviously underdeveloped nations enter the world economy. So state lawmakers are rightto be concerned about how their states rank in the global competition for jobs and capital,but they need to be more concerned withcompanies moving from Ithaca, NY, toIndianapolis, IN, than from Ithaca to India.This means that state lawmakers must beaware of how their states’ tax climates matchup to their immediate neighbors and to otherstates within their regions.State lawmakers are always mindful of their states’ business tax climates, but they areoften tempted to lure business with lucrativetax incentives and subsidies instead of broad-based tax reform. This can be a dangerousproposition as a case in Florida illustrates. In July of 2004 Florida lawmakers cried foulbecause a major credit card company an-nounced it would close its Tampa call center,lay off 1,110 workers, and outsource those jobs to another company. The reason for thelawmakers’ ire was that the company hadbeen lured to Florida with a generous taxincentive package and had enjoyed nearly $3million worth of tax breaks during theprevious nine years.
Another example comesfrom
article chronicled thatsimilar problems other states are having
1U.S. Department of Labor, “Extended Mass Layoffs in the First Quarter of 2007,” August 9, 2007, located athttp://www.bls.gov/opub/ted/2007/may/wk2/art04.htm . In the press release, DOL reported that, “In the 61actions where employers were able to provide more complete separations information, 84 percent of relocations (51out of 61) occurred among establishments within the same company. In 64 percent of these relocations, the work activities were reassigned to place elsewhere in the U.S. Thirty six percent of the movement-of-work relocationsinvolved out-of-country moves (22 out of 50).2Dave Wasson, “Florida Lawmakers Slam Capital One’s Layoff After Years of Tax Breaks,” Tax Analysts, July 24, 2004.
Kail Padgitt, Ph.D., is an economist at the Tax Foundation. He would like to thank the authors of previous editions: JoshuaBarro, Curtis Dubay, Chris Atkins, Scott Moody, Wendy Warcholik and Scott Hodge.