by Robert Maynard
Yesterday True North Reports ran a story about Vermont’s relatively high tax burden. That story reported on The Tax Foundation’s 2013 State Business Tax Climate report, which revealed that Vermont has the fourth worst tax burden in the nation. I would like to follow up on that story by going into a little detail from the report about why this matters and the factors that make our tax burden so high. First of all there is the co-relation between tax burden and relative prosperity. Here is what the report had to say on that matter:
The modern market is characterized by mobile capital and labor, with all types of business, small and large, tending to locate where they have the greatest competitive advantage. The evidence shows that states with the best tax systems will be the most competitive in attracting new businesses and most effective at generating economic and employment growth. It is true that taxes are but one factor in business decision-making. Other concerns, such as raw materials or infrastructure or a skilled labor pool, matter, but a simple, sensible tax system can positively impact business operations with regard to these very resources. Furthermore, unlike changes to a state’s health care, transportation, or education system—which can take decades to implement—changes to the tax code can quickly improve a state’s business climate.
It is important to remember that even in our global economy, states’ stiffest and most direct competition often comes from other states. The Department of Labor reports that most mass job relocations are from one U.S. state to another, rather than to an overseas location. Certainly job creation is rapid overseas, as previously underdeveloped nations enter the world economy without facing the highest corporate tax rate in the world, as U.S. businesses do. So state lawmakers are right to be concerned about how their states rank in the global competition for jobs and capital, but they need to be more concerned with companies moving from Detroit, MI, to Dayton, OH, rather than from Detroit to New Delhi. This means that state lawmakers must be aware of how their states’ business climates match up to their immediate neighbors and to other states within their regions.
As pointed out in the previous article, Vermont has the fourth worst tax burden in the nation. Put another way, we rank 47th out of 50 when it comes to tax attractiveness. To arrive at an overall tax burden, the report examined corporate tax rank, individual income tax rank, sales tax rank, unemployment insurance tax rank and property tax rate. To get a better understanding of Vermont’s over all tax burden, it is useful to examine our ranking in each of these individual tax categories.
First there is the corporate tax rate. In the 2013 index Vermont ranked 43rd in this category after ranking 41st in the 2012 index. In this category we regressed by two positions and our absolute score decreased as well. (4.50 in the 2013 index, out of a possible 10, and 4.56 in the 2012 index) When it comes to individual income tax, we ranked 47th both in the 2013 and the 2012 indexes, so there was no change in our relative ranking here. Our absolute score did drop though to a 3.01 in the 2012 index as opposed to a 3.03 in the 2012 index. In the 2013 and the 2012 index we ranked 14th in the sales tax category. Although our relative ranking did not change, we actually improved our over all score from a 5.20 in the 2012 index to a 5.22 in the 2013 index. In the property tax category we ranked 48th in both the 2012 and 2013 indexes. Our absolute scores stayed the same in both indexes as well. We went from a 19th place ranking in 2012 for the unemployment insurance tax to a 22nd ranking in 2013 and our absolute score dropped from 5.25 to 5.19.
In summary, we are somewhat competitive when to comes to the unemployment insurance tax, but we are headed in the wrong direction. We are a little more competitive in the sales tax category and are headed in the right direction. We are not competitive in any of the other tax categories and either are headed in the wrong direction or making no movement. Again, as bad as our tax burden is, it is nothing compared to what we are likely to see if Green Mountain Care is enacted and we end up having to raise the taxes necessary to pay for it.
The big question is why we have such a high tax burden. Some have speculated that our remote geography and low population is a major factor. That is a curious explanation given that the only states that have an even higher tax burden than us are California, New Jersey and New York. These could hardly be considered states with a remote geography and a low population. On the other hand, Wyoming has the least burdensome tax system and they most certainly could be considered as a state with a remote geography and a low population. I think that a more relevant factor is ideology. A high tax burden often is driven by high spending, which itself is often a result of holding to a political ideology that calls for an expanded role on the part of government.
The notion that ideological politics are the driving force behind our economic problems should not be a new idea. Allison Kingsley is assistant professor of management at the University of Vermont School of Business. Prior to joining the UVM faculty in 2010, she worked for nearly a decade in international finance. She earned her M.S.L. from Yale Law School and her Ph.D. in political science from Columbia University. Professor Kingsley wrote a September 27 article or the Burlington Free Press in which she compared the economic risk of going business in Vermont to that of doing business in countries with emerging markets: “What I hear about doing business in Vermont is eerily similar to what I hear about doing business in Kazakhstan, Argentina, or Indonesia.” She went on to point to a high tax and regulatory burden as the cause of our economic backwardness. What did she see as driving our policies of high taxes and regulation?
Vermont’s ideological politics are also at play. Existing research finds that political risk increases for business as more ideologically-motivated interest groups oppose them. Groups with ideological agendas have strongly felt preferences, tend to leverage public pressure effectively, and typically focus on politically salient or “hot” issues. In Vermont, anecdotal evidence suggests that businesses largely confront interest groups distrustful of the private sector and hostile to business interests. Environmentalist and anti-growth groups opposed the Circ-Williston highway proposal that IBM advocated. Walmart battled VNRC and buy-local groups for 18 years in St. Albans. Employee unions fought Fletcher Allen. VPIRG and NEC confronted Vermont Yankee and Entergy.
We can hide behind the excuse that our high tax burden is driven by factors like geography and population, but ideological politics looks like a more likely explanation to me.