What the Tax Foundation rankings do and don’t say about RIDecember 3rd, 2013 at 5:24 pm by Ted Nesi under Nesi's Notes, On the Main Site
Maybe it’s time for Rhode Island to take a deep breath about those Tax Foundation rankings.
A recent analysis by Governing magazine “shows no correlation between states rated higher and those with better employment indicators. In fact, some of the lowest-ranked states weathered the recession quite well.”
Rhode Island, of course, is a notoriously poor performer on those and other annual rankings. The state ranked 46th on The Tax Foundation’s 2014 State Business Tax Climate Index, ahead of only Minnesota, California, New Jersey and New York. But as Slate’s Matt Yglesias notes, those last four states actually contain quite a few businesses – Apple and Google are based in #48 California, not #1 Wyoming.
Governing also notes there are other ways to measure taxes on firms. The Council on State Taxation’s 2012 study found Rhode Island’s business tax burden ranked 39th (50th being worst), with an effective business tax rate of 5.15% of state GDP. Annual wages, household incomes, labor force participation and employment-to-population are all higher in Rhode Island than in the median state (but so is the cost of living).
Yglesias suggests the problem may be not that taxes are high in Rhode Island but that the state isn’t getting value for money. “Of course having high taxes and then wasting the money on nonsense is going to be a problem,” he writes. “I wonder if you looked specifically at places that spend a lot of money on non-service items (legacy pension costs or interest on old bonds) you might see an impact there.”
That sounds a lot like something Rob Atkinson, the former executive director of the Rhode Island Economic Policy Council, told me last year: “You’ve got two choices as a state – you can be Minnesota, where you have high costs but super-good quality, or you can be Mississippi, where you’ve got low costs but bad quality. And the whole problem is Rhode Island’s got the costs of Minnesota and the quality of Mississippi.”
Plus, debunking the tax-rate determinism of the Tax Foundation and its allies only makes Rhode Island’s situation more vexing. Most people don’t actually care that much where Rhode Island ranks on national tax comparisons – what they care about is whether the state offers employment opportunities and a rising standard of living. The tax rankings mostly serve as a proxy for those concerns.
People would shrug off Rhode Island’s low rankings if the state had a booming job market. But they don’t, because it doesn’t: the unemployment rate is second-highest in the country and per-capita income has been falling behind Massachusetts since the end of World War II. The problem is real, and disputing that tax rates are the root of it all doesn’t make the problem go away – it just means you need your own explanation.
• Related: Why does RI lag Minnesota and Massachusetts in the CNBC rankings? (July 10)