Des Moines Register
03-02-07
To attract businesses, think beyond tax rates
By GARY MAYDEW
IOWA VIEW
When businesses locate in a state, what factors do they really consider?
Forbes Magazine recently published a list of the largest privately held companies
in the United States. I counted the number of businesses for each state and then
ranked the states for the number of large, privately held businesses per million of
population. Rhode Island (surprisingly) had the most large privately held
businesses at 2.8 per million, followed by Wisconsin, Missouri, Nebraska and
Idaho.
At the other end of the spectrum, Hawaii, Louisiana, New Mexico, both Dakotas,
Vermont and Wyoming had none of the businesses. Iowa, with 1.3 businesses
per million, was in the middle of the pack.
Would the states that are more tax-friendly have more large, privately held
businesses? Not especially. The Tax Foundation ranks the 50 states on how
"business friendly" their tax systems are. According to the report, "The worst
state tax codes tend to have complex, multi-rate corporate and individual income
taxes; above-average sales tax rates that don't exempt business-to-business
purchases; complex, high-rate unemployment tax systems; and high effective
property-tax rates, as well as a host of other wealth-based taxes."
Iowa ranked toward the bottom for worst state tax codes (42nd among the
states). I ran a correlation analysis of number of businesses per million per state
with the Tax Foundation's rankings. The correlation was a measly .108. In other
words there was almost no relationship between how tax friendly a state is and
the number of large, privately held businesses it has.
But perhaps tax-friendly is too narrow a specification. A more general measure of
business friendliness is provided by the Small Business & Entrepreneurship
Council. In addition to tax rates, the council considers such factors as healthinsurance mandates, utility costs, crime rates and spending of state and local
government. Iowa didn't fare well here either (41st). Again I did a correlation. This
time the correlation was negative, i.e., there was a negative, albeit weak,
relationship between supposed business friendliness and number of large,
privately held businesses in the states.
So is there any ranking that is positively correlated with the location of large,
privately-held businesses? Well, the Morgan Quitno Press publishes rankings of
the most livable states. Forty-four positive and 25 negative factors are
considered. In addition to various economic statistics, some of the factors used
are crime rates, bankruptcy rates, pupil-teacher ratios, infant-mortality rates,
poverty rates and books in public libraries. Iowa looked great in this ranking
(third). The correlation here was a positive (though very weak) .161.
Conclusion: Perhaps tax rates and various handouts to businesses are not as
important as we think. Just maybe, in attracting and keeping businesses, it is
more important for states to maintain a high quality of life for their citizens.
Instead of worrying incessantly about our tax rates, perhaps we Iowans should
focus on education, clean air and water, recreation facilities and vibrant cultural
opportunities. Something for our leaders to think about.
GARY L. MAYDEW is a retired accounting professor in the College of
Business at Iowa State University.