State of Mind

Coming back from vacation to dismal jobs news inspired me to attempt putting together some economic analysis of my own.  I started with an article from Barron’s that ranked states from a financial health perspective.  I overlaid that with a presentation done by a member of my LinkedIn alumni group  that ranks various aspects of state tax policy in terms of friendliness to taxpayers.  I had this theory that fiscal health and physical health were similar in the “no pain no gain” area.  You eat nothing but doughnuts and watch TV then you look and feel like Homer Simpson.  You eat vegetables and chop your own salads, and then you still have plenty of energy to count your money.  Or something like that…  Anyway – it wasn’t true.

California scored on two of Aaron Skloff’s worst states for “….tax” lists, and they also got the worst spot on Barron’s shakiest credit list.  However, New Hampshire tilted toward the tax friendly side of the ledger, and it sits right next to tax-unfriendly New York on Barron’s shakiest list.  Actually as an accountant I should be the first to know that you need to look at both sides of the entry.  It’s not just how much you collect in taxes – it’s also how much you spend. 

Barron’s also brought in unemployment as a factor to consider – needless to say unemployment lowers tax receipts regardless of the rate.  However, taxing tough didn’t pay or hurt in terms of jobs.  The states with no income tax had an average unemployment rate of 8.1%.  The top 5 states in terms of income tax rates had an average unemployment rate of 8.2%.  One area with a little correlation was sales tax (a recent favorite topic of mine).   The states with no sales tax had an average unemployment rate of 7.5%, and the states with the 5 highest sales tax rates had average unemployment of 8.9%. 

Clearly I should stick with accounting, and not move into economics.  The experts in that field added two more points in the Barron’s article that are worth noting.  First is that federal budget cuts will have disproportionate impact in states with many federal contracts (AAA rated Virginia gets almost 30% of state GDP from Uncle Sam and Maryland isn’t far behind).  

Last and most importantly, there is no number that indicates the willingness to introduce structural change into state spending.   That is the essential ingredient in fiscal stability, and probably the most relevant component of how one would rate a muni bond.  Sigh.

Location, Location, Taxation

As the talk about tax reform increases in Washington, the actions of businesses are moving that one step faster.  Even with the current real estate relocation challenges businesses are making the effort to locate in a way that mitigates their tax burden.  One big example appeared in this week’s Wall Street Journal  where they detailed how many US based companies that have the opportunity to incorporate offshore prior to an IPO (lots of restrictions on this, but it can be done) are making sure to do so.  Another area that’s getting plenty of attention now is state taxation.  Certainly the buzz I hear is that companies are doing the tax math in terms of both their initial location and how they grow the business.

The Small Business & Entrepreneurship Council just released their Business Tax Index of 2011 ranking the 50 states in terms of tax friendliness.   The top five friendly states are:  South Dakota, Texas, Nevada, Wyoming and Washington.  The five worst:  California, Maine, Iowa, New York, New Jersey, Minnesota and Washington DC.  (I don’t know if that last one is supported by data or emotion.)  Speaking from my own limited experience I would say that New York, California and New Jersey don’t make it easy for small business owners in terms of taxes.  In particular, they have a thicket of fees for corporations located outside of the state who do business in the state that make the airlines look like they have transparent pricing. 

Of course, the issue is more nuanced than just thinking about income taxes.   For example states that have no income tax like Texas and Florida have other “fees”  that impact the bottom line of a business the same way a tax does.  A recent Ernst & Young study on the topic noted that income taxes from businesses make up a relatively small portion of state budgets, but that in 2009 property taxes collected from businesses by states  went up.  In the midst a huge commercial real estate crisis, business property taxes collected are going up?!  The other direct tax issue to consider is personal vs. corporate tax rates.  Many small business owners pay taxes on their profits via their personal returns, so that’s an important factor to consider. 

Like everything else involving taxes it’s not straightforward, but doing the math during your tax planning time rather than at filing time is worth the effort.