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Business Climate Rankings Don’t Make the Grade

May 2, 2013 Common Cents

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You don’t have to listen long in Concord before you hear them:  claims about where taxes in New Hampshire stand in relation to other states and why that means the state must adopt or change a particular policy.

Yet, a major new study released yesterday concludes that some of the most commonly cited sources for such rankings suffer serious flaws and should not be used as a guide for setting state fiscal policy.

Entitled Grading Places, the study takes a hard look at four sets of “business climate” rankings:

  • the U.S. Business Policy Index, published by the Small Business & Entrepreneurship Council;
  • the State Competitiveness Report, compiled by the Beacon Hill Institute;
  • the State Business Tax Climate Index, created by the Tax Foundation, and;
  • Rich States, Poor States:  The ALEC-Laffer Economic Competitiveness Index

Grading Places enumerates in detail the problems plaguing these rankings. For instance, it finds that they have little relation either to the actual level of taxes businesses pay or to economic outcomes.  Moreover, it notes that, while these rankings claim to examine the same basic question, the same state can fare well in one, but quite poorly in another.

New Hampshire illustrates well these inconsistencies. Under the Tax Foundation’s Business Tax Climate Index, New Hampshire has an overall ranking of 7th.  In contrast, ALEC’s Rich States, Poor States puts it in 20th place.  Even two more sophisticated analyses examined in Grading Places – KPMG and Ernst & Young –  have very different views of New Hampshire’s tax system.  The KPMG assessment, conducted on behalf of the Tax Foundation, puts New Hampshire squarely in the middle of the pack, while Ernst & Young’s model, created for the Council on State Taxation, finds New Hampshire is in the top ten.

As disparate as their results, these rankings share a common perspective that business taxes are a key determinant of economic growth.  However, as Grading Places points out, “extensive academic research…reveals that taxes are such a small share of business costs that they have little effect on investment decisions.”  What matters instead are “investments in education, job training, infrastructure, health, and public safety.”


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