I'm surprised I didn't see this study sooner. I'm not surprised that salesman-in-chief Dennis Daugaard hasn't mentioned it.
Jeff Rosenberg of MNPublius spotlights a study on state and local business taxes by Ernst and Young for the Council on State Taxation. They calculate state and local tax burden as a share of Gross State Product, all the goods and services that each state cranks out each year. In other words, take all the state and local taxes businesses paid and divide by all the business they did. How did South Dakota rate in Fiscal Year 2009 compared to the rest of the country?
| State Taxes ($ US bln) | Local Taxes ($ US bln) | State + Local Taxes ($ US bln) | |||||
|---|---|---|---|---|---|---|---|
| State | Business | Total | Business | Total | Business | Total | % of GSP |
| Alabama | $3.90 | $8.90 | $2.70 | $4.90 | $6.50 | $13.80 | 4.6 |
| Alaska | 4.8 | 5.1 | 0.6 | 1.4 | 5.4 | 6.5 | 13.8 |
| Arizona | 5.1 | 11.1 | 5.2 | 8.8 | 10.3 | 19.9 | 4.8 |
| Arkansas | 2.9 | 7.7 | 1 | 1.8 | 3.9 | 9.6 | 4.6 |
| California | 48.3 | 110.5 | 28.9 | 62.5 | 77.2 | 173 | 4.7 |
| Colorado | 3.3 | 9 | 5.3 | 9.9 | 8.6 | 18.9 | 3.9 |
| Connecticut | 4 | 12.5 | 3.2 | 8.9 | 7.2 | 21.4 | 3.7 |
| Delaware | 1.7 | 2.9 | 0.3 | 0.8 | 2 | 3.7 | 3.5 |
| Florida | 15.2 | 32.8 | 19.3 | 36.6 | 34.5 | 69.4 | 5.3 |
| Georgia | 5.6 | 16.6 | 8.3 | 15.2 | 13.9 | 31.9 | 4.1 |
| Hawaii | 1.5 | 4.8 | 1.1 | 1.6 | 2.6 | 6.4 | 5.3 |
| Idaho | 1.1 | 3.3 | 0.8 | 1.3 | 1.9 | 4.6 | 4.2 |
| Illinois | 13 | 29.4 | 13.4 | 31.5 | 26.4 | 60.9 | 4.6 |
| Indiana | 4.7 | 15.2 | 4.6 | 7.6 | 9.3 | 22.8 | 4.1 |
| Iowa | 2.4 | 6.9 | 3.2 | 4.9 | 5.6 | 11.7 | 4.6 |
| Kansas | 2.6 | 6.9 | 3.1 | 4.8 | 5.6 | 11.6 | 5.4 |
| Kentucky | 4.3 | 10.2 | 2 | 4.1 | 6.3 | 14.3 | 4.8 |
| Louisiana | 5.2 | 10.1 | 4.9 | 6.4 | 10.1 | 16.5 | 5.1 |
| Maine | 1.2 | 3.5 | 1.6 | 2.2 | 2.8 | 5.7 | 6.5 |
| Maryland | 5.6 | 16.3 | 3.7 | 12.7 | 9.3 | 29 | 4.2 |
| Massachusetts | 7.2 | 21 | 6.1 | 12.3 | 13.3 | 33.4 | 4 |
| Michigan | 9.1 | 25.7 | 7.7 | 14.2 | 16.9 | 39.9 | 5 |
| Minnesota | 6.5 | 18 | 3.5 | 6.4 | 10.1 | 24.3 | 4.3 |
| Mississippi | 2.5 | 6.4 | 1.9 | 2.5 | 4.4 | 9 | 5.8 |
| Missouri | 3.9 | 10.9 | 4.6 | 9 | 8.4 | 19.9 | 4 |
| Montana | 1.2 | 2.5 | 0.7 | 1 | 1.9 | 3.5 | 6.3 |
| Nebraska | 1.6 | 4 | 2.1 | 3.4 | 3.7 | 7.4 | 5.1 |
| Nevada | 3.1 | 6.2 | 2.7 | 4.5 | 5.8 | 10.7 | 4.9 |
| New Hampshire | 1.3 | 2.2 | 1.4 | 2.8 | 2.7 | 4.9 | 5 |
| New Jersey | 11.5 | 29.1 | 8.5 | 23.7 | 20 | 52.8 | 4.7 |
| New Mexico | 2.8 | 4.7 | 1.1 | 2 | 3.9 | 6.8 | 5.9 |
| New York | 21 | 59.5 | 35.9 | 72.9 | 56.9 | 132.4 | 5.5 |
| North Carolina | 7.2 | 21.4 | 4.8 | 10.4 | 12 | 31.8 | 3.5 |
| North Dakota | 1.6 | 2.5 | 0.6 | 0.9 | 2.2 | 3.4 | 8.2 |
| Ohio | 11 | 26.7 | 10.2 | 21.4 | 21.2 | 48.2 | 5.1 |
| Oklahoma | 3.8 | 8.2 | 2.3 | 4.1 | 6.2 | 12.2 | 5 |
| Oregon | 2.1 | 8 | 2.7 | 5.4 | 4.9 | 13.4 | 3.5 |
| Pennsylvania | 13.4 | 32.1 | 9.4 | 22.7 | 22.8 | 54.8 | 4.6 |
| Rhode Island | 1.1 | 2.8 | 1.2 | 2.2 | 2.3 | 5 | 5.7 |
| South Carolina | 2.5 | 7.7 | 3.6 | 5.5 | 6 | 13.2 | 4.7 |
| South Dakota | 0.7 | 1.4 | 0.8 | 1.2 | 1.6 | 2.6 | 4.9 |
| Tennessee | 5.2 | 11 | 4.3 | 7.5 | 9.5 | 18.4 | 4.2 |
| Texas | 25.8 | 43.4 | 27.8 | 45 | 53.7 | 88.4 | 4.9 |
| Utah | 1.9 | 5.6 | 1.7 | 3.2 | 3.5 | 8.7 | 3.7 |
| Vermont | 1.1 | 2.4 | 0.2 | 0.4 | 1.4 | 2.8 | 6.3 |
| Virginia | 4.5 | 16.8 | 7.2 | 14.7 | 11.7 | 31.5 | 3.6 |
| Washington | 9.6 | 17.8 | 5.2 | 11 | 14.7 | 28.7 | 5.3 |
| West Virginia | 2.1 | 4.9 | 1.4 | 1.7 | 3.5 | 6.6 | 6.9 |
| Wisconsin | 5 | 14 | 4.7 | 9.5 | 9.7 | 23.6 | 4.6 |
| Wyoming | 2 | 2.6 | 1 | 1.3 | 3 | 3.9 | 9.7 |
| D.C. | 2.8 | 5.3 | 0 | 0 | 2.8 | 5.3 | 4.2 |
| United States | $311.50 | $748.40 | $278.40 | $550.70 | $590.00 | $1,299.10 | 4.70% |
Against our neighbors, we come out o.k. Businesses in Wyoming, Montana, North Dakota, and Nebraska pay a larger percentage of gross state product in taxes than we do. But in Iowa and, most significantly, in our great nemesis Minneosta, businesses pay slightly less as a share of GSP than their counterparts here in South Dakota. South Dakota's tax bite of 4.9% out of GSP is actually higher than the national average of 4.7%.
Wait: for all the Pierre-generated ballyhoo over South Dakota's wonderful low-tax business climate, how can South Dakota still be taking a larger share of the business pie than the People's Democratic Republic of Minnesota? Let's take a look at the composition of state and local business taxes nationwide:
- Tax on business property: 36%
- Sales tax on businesss inputs: 22%
- Excise, utility, and insurance taxes: 13%
- Corporate income tax: 9%
- Business license and other business taxes: 9%
- Individual income tax on business income: 6%
- Unemployment insurance tax: 5%
The COST study finds income taxes make up only 15% of the state and local tax pie. State corporate income tax simply isn't the biggest item in the corproate ledger. We tout our lack of an income tax, but once businesses get here, we sock them with property tax and sales tax.
Now a slightly higher than average state/local tax burden isn't inherently bad. We might charge businesses a little more in taxes but also provide them increased public services that reduce other costs: paved and plowed roads that make transportation more efficient, schools that train workers and decrease crime and disease, police and firemen to protect your property, etc.
Alas, South Dakota's taxes provide only a fair to middling return on investment in terms of benefits from public services. There's some debate as to how much direct benefit businesses get from schools: some economists say the benefit goes entirely to hosueholds, while others contend a literate workforce is a great business benefit. Whatever the actual return ratio on education spending, when we look at all state and local government spending, South Dakota companies actually have a higher tax-to-benefit ratio than the national average. If you assume that businesses get half of the benefit of public spending on education, businesses in South Dakota pay $1.40 in taxes for every dollar they get in direct benefits from state and local government. In Minnesota, businesses pay $1.14 for every dollar of state and local service. Businesses come out better in South Dakota than in Minnesota only if we assume that they get no return on education spending. Even under that unrealistic assumption, South Dakota's tax-benefit ratio is only 2% better than Minnesota's. And South Dakota's ratio is only getting worse as the state cuts education even further.
COST is a business organization, originally formed by the Council of State Chambers of Commerce. These aren't hippies like me; these are hard-headed businessmen assessing the tax climate in every state. Hard-headed business types look past the rhetoric and crunch real numbers. The COST numbers show South Dakota doesn't really provide businesses great tax savings, and the taxes paid don't provide remarkable benefits in return.
South Dakota has a good business climate in their own mind. The amount of business done in South Dakota is pathetically small compaired to Minnesota. Minnesota spends more per student on education. But 90% of Minnesota college grads stay in the state and 50% of South Dakota college grads leave. So Minnesota gets more for their money, South Dakota just has more grandkids living in other states. Makes for lots of out of state vacations. We do not get the value of our education money since the kids with the most education leave the state. In South Dakota's mind they think they have a good business climate but the facts do not back it up. But if we keep our heads in the sand we can still be happy because we will not know what the rest of the world is like. (Oh, I grew up in Minnesota so I have seen other situations. I also lived in Michigan and Washington.)
This "study" simplifies things so much that I suspect it would mean nothing (or maybe even less than nothing) in real terms to any individual who contemplates starting a business and who wants to decide where to do it.
Wyoming looks bad in the table, even though it's been rated as one of the best places for small businesses to start up. I suspect, however, that the severance tax skews the result for Wyoming.
The study neglects other factors besides taxes, such as the cost of housing, the cost of utilities, and the types of businesses that predominate.
We will never be like Minnesota here; we'll never have a dynamic cultural center like Minneapolis.
Even California looks better than we do in the table here! We'll never have a high-tech center such as the Bay area.
Massachusetts looks "way better" than we do in the table above! We'll never have schools like Harvard.
My particular type of business (writer) resembles farming or ranching in the sense that it takes "great grit" in the face of social and economic headwinds; yet it's nothing like farming or ranching when it comes to overhead expenses. (My tax return for 2010 will show almost no deductions on Schedule C, thanks largely to electronic media.) I do quite well in South Dakota, in terms of the ratio of total tax to total output -- far better than I would do in Minnesota or California or Massachusetts.
The place where I sometimes have a problem can be physically traced to some part of my Left Brain, which occasionally craves for a Minneapolis or Boston or San Francisco. But I've decided I can't afford those places, largely because of the high taxes and the extra paperwork that the income tax involves, but also because of the high cost of housing.
Lifestyle also matters! I don't need a lot of fancy stuff to make myself happy. That saves not only taxes, but just plain old dollars out. I do, however, pay an awful lot to keep warm around here.
Each individual business must evaluate its own situation when deciding on a place to locate.
Comparing all these diverse "studies" leads me to the conclusion that, in the main, they are all 99.44 percent B.S., just like all organized religions.
You have to excuse me if I am somewhat cynical of what the state tells me. We have been hearing the same story for the last 20 or 30 years that SD has a better business climate and lower taxes yet I have yet to see businesses flocking to the state of SD so why would they do that now?
Here's an interesting piece:
http://www.foxbusiness.com/industries/2011/03/31/corporate-relocation-hinges-talent/
God bless Texas.
So... if businesses bear a higher burden in SD than MN as a % of GSP, what's the solution? Will increasing taxes on businesses / individuals to pay for new services yield a more-than-proportionate increase in GSP? Maybe if we're talking about getting a lot of business incubators going, and a program that helps match entrepreneurs with angel investors...
One challenge I've seen while working with small towns is there's often opposition to new businesses that don't "fit". I think there's a lot the State and localities need to change to make SD more business friendly, especially when we're talking about growing our own.
On small towns: I wonder what there is to "fit". Short of selling drugs and hookers or ovetaxing the local physical resources, I'd think most small towns would say if you're making jobs and money, you fit. Most small towns are in no position to be choosy!
Solution: always the tricky question! Have any economists worked out an ideal tax:GDP ratio? Even if they have, Stan's comment gets me thinking the number would be rather remote and abstract from the many other factors that motivate business location. I'm inclined to think we should focus less on seeking rock-bottom tax rates and more on providing services that increase the quality of life within reasonable fiscal limits.
Re: Small towns: You'd think so, but they are. Not wanting hunting lodges, not wanting So & So to open a bar or restaurant... not wanting an outsider to come in and start up something different.
I'm inclined to agree - focus on quality of life within reasonable fiscal limits. That's easy to say, hard to do. What we really need are accountable, attainable benchmarks and milestones, and consequences if they're not met. Just as you speak of the LAIC, there should be consequences if goals aren't met. If it means removing leadership and finding a better fit, then so be it.
I've visited the Incubator in Sioux Falls. It's pretty neat. If we had more things like that (and made them well-known) then it'd be easier to grow our own small businesses from innovative entrepreneurs. If it takes a village to raise a child, it doesn't seem to far a reach that it takes a community to help businesses succeed. I like that form of corporate wellfare better than throwing money at businesses to relocate.
"Not wanting hunting lodges"?!? Get out! Who in South Dakota ever says no to hunter money? (Hmm... except maybe farmers who've had one too many trespassers?) I can understand a desire to see local folks rather than outsiders running stuff... but if local folks aren't putting up the cash and vision to make stuff happen, they shouldn't complain when an otuside entrepreneur sees and opportunity and makes it happen.
Good turn of the "takes a village" phrase. The Incubator -- where is that?