On Friday, Governor Dennis Daugaard signed House Bill 1230, his plan to divert $16 million a year from the general fund to give myopic handouts to corporations building really big projects in South Dakota. Nathan Johnson's article in the Yankton Press & Dakotan on economic development strategies thus comes a day late to the debate over how best to invest our public resources.
But oh, what an article. Johnson writes a regular term paper, chock full of numbers and experts indicating that South Dakota's strategy of recruiting itinerant out-of-state corporate-welfare seekers with low-wage, low-tax policies doesn't produce much return on investment.
Citing Jed Kolko's 2010 study, Johnson reports that interstate business migration accounted for 1.9% of job gains and 2.0% of job losses nationwide from 1992 to 2006. States like South Dakota and Kansas see higher rates of jobs crossing their borders. States like Texas, Montana, and California see lower job in-migration and out-migration. What's the difference? Geography:
South Dakota is a large state geographically, but its biggest city, Sioux Falls, is close to Minnesota and Iowa, meaning businesses can move to a neighboring state and still manage to retain most of their workforce, which reduces the cost of relocation.
"In contrast, (relocation out of) California tends to be quite low. The same is true for Texas," Kolko said. "When you think about where the big cities in those states are, they're all really far from a state border. All the economic activity in California is on the coast, for the most part. You've got to move your business hundreds of miles if you were to relocate it to another state. That means getting a new workforce. It's very expensive. You can't just move across the state border like you could between Washington, D.C., and suburban Maryland, or between New York City and New Jersey and keep most of your workforce" [Nathan Johnson, "Jobs Don't Grow on Trees," Yankton Press & Dakotan, 2011.03.12].
Supporting Kolko's geography-over-policy hypothesis is the fact that South Dakota's job migration rates are higher than the national average in both directions: we rank sixth in share of job gains from businesses coming in, but we also rank fifth in share of job losses from businesses moving out. We come out with a small net gain, but business migration accounts for just 3.6% of job gains and losses. The gains we make luring businesses from other states are mostly washed out by the businesses we lose to other states.
Meanwhile, the vast majority of job gains and losses come from homegrown businesses. Governor Daugaard's fantasies of luring businesses from high-tax states are nibbling around the edges. It's also unneighborly and self-defeating. Purdue economic development expert Ed Morrison says the following of neighboring states' hopes of poaching Illinois industry following Illinois's income-tax hike this winter:
Since when is kicking your neighbor, who is trying to pick themselves off the floor, smart policy? Illinois is the largest state economy in the Midwest. Neighboring states need Illinois to be stable and growing, not hobbled and senseless [Ed Morrison, "The Misguided Competition of Midwest Governors," Ed Morrison's Garage, 2011.01.15].
Morrison says differences in tax rates just aren't big enough to justify much business migration. A small manufacturer making $5 million in revenue might make $500,000 in taxable profit. The 2% tax rate reduction an Illinois factory might enjoy by hopping the border would save the company $10,000. By Morrison's numbers, I speculate moving to South Dakota might save the company $35,000 in taxes. The company would spend many times that amount acquiring a new facility, moving its equipment, and hiring and training a mostly new workforce.
Given such minimal returns, Morrison says, "The companies that could be persuaded to move on the basis of state tax rates are probably already weak competitively." Johnson cites Don Schjeldahl, another economic development expert who spoke in Yankton recently, to explain where that weakness may come from:
Schjeldahl pointed out that a lot of companies that are moving to get away from something like taxes are tied to old technology.
"If you're thinking about building a new economy, do you really want those guys that are just trying to stretch out what they're already doing?" he asked. "They're weak to begin with and haven't modernized. A lot of companies get driven out of California, for example, because of the environmental laws. They want to just replicate what they're already doing, which is old environmental technology" [Johnson, 2011.03.12].
In other words, if a company has good people and good ideas, it can probably compete and innovate its way to profits in any state regulatory scheme. If it can't, it comes to South Dakota, takes advantage of our desperate handouts, and sandbags our economy with more low wages and obsolete business practices (that's my conclusion, not Nathan's).
Almost hilariously, secretary of economic development Pat Costello rides into Johnson's article and ignores everything the experts are saying. Faced with all this evidence that tax structures don't matter much, Costello says, "Our tax structure makes South Dakota an especially appealing option for companies looking to escape poor regulatory climates." When Morrison says states need to collaborate to support regional development strategies, Costello retreats to more irrational exceptionalism, saying South Dakota is better off than everyone else and shouldn't drag itself down by cooperating with laggardly neighbors.
Pat, get off the talking points. Read the data. South Dakota's low-tax, low-wage, corporate welfare policies aren't doing what you say they're doing.
And Nathan, thank you for a spectacular bit of journalism. Even if Costello won't, every South Dakota policymaker should read Johnson's report.
Nathan is one heck of a journalist. His blog is great and his articles in the P and D are consistently the best. We're lucky to have him.
If the governor's voodoo economic development were worth a tin cup the USD B-school would publish and push on it. But economic development strategies based on poaching and out-of-state corporate welfare seekers would never survive peer review.
Today's Argus Leader comparison of top Sioux Falls employers, 1981 v. 2011, favors what you are saying.
The most significant job increases were with hometown Sanford and Avera health systems (an increase of about 10,000 jobs).
At the same time, there was a smaller addition with the immigration of Wells Fargo and Citibank, which combined to add about 6,300 jobs.
[CAH: Remarkable! And I suspect health care is a little more recession-proof than usury. See the article to which Father Tim refers here!]
It appears to me that tax structures don't matter much when it comes to business climate, as long as the tax rates and structures remain constant. However, a sudden change in tax structure might be another thing entirely.
We ought to get a good test of the business-related effects of a sudden tax increase by watching Illinois over the next couple of years, and comparing them with, say, Wisconsin, a state that has openly said they want to lure businesses from Illinois specifically because of the increases in the Illinois taxes.
Here's an interesting thing that I've heard about the lack of a state income tax ... If a state has no income tax, then when people lose their jobs, the state loses less revenue than it would if an income tax existed. (No income, no tax.) That notion could extend to a rational (if cynical) argument to the effect that we should keep the sales tax on food, because people have to eat whether employed or not!
In the end, I suspect that good infrastructure, good education opportunities, low crime, and responsible budgeting (living within the limits imposed by available revenue) matter more, when it comes to attracting businesses, than absolute tax rates or structures.
The problem with the entire study is time. Go to the industrial parks of every city in South Dakota. Common theme: Well over 50% migrated here from another state. When they came, they were all much smaller so the timeframe of the study wouldn't show much job migration. But over time, the South Dakota operation got a significant portion of the growth and in many cases led to a complete relocation.
P.S. Stan:
The reason it is about "stability of tax rates" is because we have insufficient data on the effect of dropping tax rates is because it so seldom happens.
Also, tax structure and rates is significant as it is a diversion of profits from growth and capacity for wages to government uses. The lower the tax rate, the more available capital for growth. At the end of the day, South Dakota manufacturers have weathered the recession better than most because they are financially healthier because they have paid less taxes over time.
Regarding those items you list at the end too contribute to the success but they don't transcend taxes because it much of the country they are true to many places. What distinguishes South Dakota is its low tax structure.
Troy:
When I wrote the above comments, I hoped someone would come out and say what you did.
The low tax structure here, and the low cost of housing, attracted me from Wisconsin in 2004.
My income does not depend on where I live. I therefore have an incentive to seek out low-cost arrangements.
I suspect that in the future, more people will work in modes such as I do -- making low-tax states increasingly attractive.
But at what point, Stan, do substandard services (schools, roads, etc.) start trumping the desire to pay lower taxes?
Lawrence County gets Deadwood gaming revenue: http://www.deadwoodhistorylink.com/legislators/formula.php
"But at what point, Stan, do substandard services (schools, roads, etc.) start trumping the desire to pay lower taxes?"
I guess it depends on the dispositions people who live in the state. Most of the people in South Dakota are conservative, if the recent election can serve as any gauge.
People in Michigan or California might have a different outlook. They have a different level of taxation, and a different amount of state government debt.
Hopefully, a happy medium exists between substandard services and burdensome taxes.
I maintain that if we adopt a new tax such as an income tax or a gross-receipts tax, or even if we dramatically raise the sales tax, it will have an immediate negative effect. People will see that they have less money, so they'll spend less and invest less. Companies might have to lay off some workers to stay in the black.
If people want a high-tax state, they can always go to Michigan or California.
I would not call our schools substandard. (As for roads and other services, I cannot say. I don't ask for much in those departments.)
Does anyone happen to know: Is it true that Lawrence County derives all of its school funding from local property taxes, and rejects aid from the state for its schools?