Economic Development Policy Part 2: Supply side policies ECON 4480 State and Local Economies 1

Site Selection Rankings

3

What matters? 4

Tax Foundation State Business Tax Climate for Source:

Best States 1.Wyoming 2.South Dakota 3.Nevada 4.Alaska 5.Florida 6 Worst States 46. Rhode Island 47. Vermont 48. California 49.New Jersey 50.New York Tax Foundation 2013

Tax Foundation State Business Tax Climate 7

State Top Income Tax Rates 8

Sales Tax Rates 9

Property Taxes 10

Tax Burden 11

Does it Matter? Annual Average Rate of Growth Per capita income Earnings per jobEmployment Unemployment rate Best States2.2%2.4%0.6%8.4% Worst States2.6%1.8%-0.1%9.4% 12

Tennessee Taxes 13 Tennessee tax structure (relevant items): No tax on household earned income, No statewide property tax. The primary taxes on business are the Excise Tax and the Franchise Tax. Excise Tax – is 6.5% of Tennessee taxable income for a corporation, LLC, or limited partnership, Franchise Tax – is 0.25% of Tennessee net worth, with a minimum of $100 annually. Excise and Franchise Taxes average about 14% of total state government revenue; typically one of the most volatile components of revenue.

Right to work states states have right to work laws. Two states in the industrial north have recently passed right to work (IN and MI)

Right to work Proponents of right to work rely on arguments concerning the liberty of workers choice of where to work, without being compelled to join a union. Opponents of right to work point out the free rider problem that non-union workers would enjoy in a union shop: the union negotiates a favorable pay package that applies to non- members as well as union members. Right to work does not prohibit unions; for example, workers in the GM plant in Spring Hill belong to the United Auto Workers. Yet, Tennessee is a right-to-work state. RTW will matter for some relocating firms. RTW is not as important as other differences between locations. 15

Comparing state outcomes 16 RTW states experience substantially higher job growth in the long run ( ). However, most jobs still are in the non RTW states.

Comparing state outcomes 17 Per capita income lower in RTW states, but growing a little faster (+0.5%) than in non RTW states. RTW states comprise just 38% of total U.S. personal income for Clearly, more than RTW matters.

Comparing state outcomes 18

Summary and conclusions: supply-side policies Six conclusions regarding supply-side polices: – 1) supply-side considerations can matter, but other factors such as workforce quality and access to markets (transportation networks) typically matter more. – 2) supply-side incentives are offered in order to remain competitive with other states, – 3) new supply-side incentives will work for a time, but soon, other states will offer the same incentives, 19

Summary and conclusions: supply-side policies – 4) states must balance the benefits of tax incentives with the costs in terms of lost revenue, – 5) right to work is associated with higher job growth but lower average pay; the advantage of RTW may exist mostly as a signal of a favorable business climate, – 6) simplifying and streamlining the incentive and permitting process and establishing a simplified tax structure may be the most effective means to demonstrate a positive business climate. 20