Experts dispute states glowing tax ranking

February 27, 2012
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LANSING — Economic experts are divided after a tax advocacy group’s study jumped Michigan from 49th to 7th place in corporate tax rankings.

The Tax Foundation, a nonprofit research group based in Washington, D.C., also cited the state’s upgrade from 18th to 12th in overall business climate.

According to Mark Robyn, an economist with Tax Foundation, the criteria for a state’s positive ranking include low taxes and a broad tax base while keeping tax policy as simple as can be.

“Essentially, the ranking is intended to indicate how business friendly state corporate taxes are,” Robyn said.

Robyn noted the foundation’s decision to update Michigan’s ranking is based on the state’s current tax policy, which went into effect Jan. 1, and how it compares to tax policies used in the study last July.

Robyn said it conducted this “hypothetical” ranking to highlight the “impressive improvement” in the state’s tax structure. He said state’s actual corporate tax ranking is still 49th and overall business climate ranking is 18th.

“Initially, Michigan’s system was really bad across the board,” Robyn said. “This is definitely one of the better reforms I’ve seen.”

Lawmakers approved a tax restructuring last year, which replaced the Michigan Business Tax and the corporate income tax with a 6 percent flat tax.

Michael Finney, president of the Michigan Economic Development Corp., said the new study is a necessary morale boost for the state.

“Confidence that Michigan is on the right track helped to create 80,000 private-sector jobs in the state last year,” Finney said. “Our improved ranking only solidifies what business sees as renewed opportunities in Michigan. Our improved business climate is encouraging new investment that puts families to work and fuels Michigan’s prosperity.”

However, Jon Shure, director of state fiscal strategies at the Center on Budget and Policy Priorities in Washington, said the rankings say little about states’ real business climate.

“If someone told you a city’s average temperature but not how much it rains there, how would you know whether you liked its climate?” Shure asked. “The Tax Foundation’s annual ranking of states’ business tax climate is similarly lacking.”

Shure said that the ranking’s grading scale starts and ends with taxes, and generally rewards states that have low taxes. He said that the ranking doesn’t indicate reliability of public services that can be detrimental to a state’s economic future, such as schools, transportation and the safety of communities.

“Since schools, roads and other necessities cost money, the ranking actually rewards states that don’t invest in what makes them attractive places to live and work,” Shure said. “States should base taxes on what it takes to build a strong economy, not what it takes to get a nice ranking from the Tax Foundation.”

According to Peter Fisher of the Iowa Policy Project, the Tax Foundation focuses on selected characteristics of the tax code while ignoring important features like the actual amount of taxes that businesses pay.

“Results differ wildly from a ranking based on what businesses pay in many cases,” Fisher said. “What this annual release offers is, at its core, an indefensible mishmash of ‘stuff the Tax Foundation doesn’t like,’ which should be the title.”

Gov. Rick Snyder said the new ranking is proof that Michigan is making a great comeback, crediting that to a balanced budget and tax overhaul, which he said allow private sector jobs to flourish.

“Once again, the nation is taking notice of the bold reforms that are driving Michigan forward,” Snyder said. “The bold reforms we made in 2011 dramatically improved the state’s tax ranking and are further proof that the best way to boost Michigan’s economy and improve the quality of life for all is to create an environment that encourages job growth and innovation.”

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