Every year, the Tax Foundation releases its State Business Tax Climate Index. Every year, West Virginia fares poorly in this ranking, this year we come in at 37. The argument is that taxes matter to businesses, they affect business decisions, job creation and the long-term health of a state’s economy. Therefore, a state with low tax costs will be more likely to attract business development and have a healthy economy. A particular state’s tax climate is important, as state’s will compete with their neighbors and business will choose to locate in the those states with the most favorable tax climates.
But taxes only tell part of the story, and the example of Minnesota and South Dakota demonstrate this. South Dakota is consistently ranked as among the best tax climate states, this year they are number 1. South Dakota’s neighbor Minnesota on the other hand, usually ranks near the bottom, 43 this year. So it makes sense then that South Dakota’s much more favorable tax climate would lead to a much stronger and vibrant economy than in Minnesota, seeing that the states are in close proximity to each other and the disparity in their tax climates is so great. Well, let’s take a look.
Source: Tax Foundation, US Census Bureau, and Bureau of Economic Analysis
Minnesota, despite a substantially worse business tax climate than its next door neighbor, has a higher per capita income, higher job earnings, higher hourly wages, higher household income, a more educated population and a lower level of poverty than South Dakota.
So what does this suggest? While taxes are important for a state’s business climate, they are not the main driving factor. Businesses also need high-quality, well-administered public services.
Studies have shown that states with high-quality public services, including good infrastructure and quality schools and colleges that produce a skilled and well-trained workforce, have excellent business climates. On the other hand, states that sacrifice quality public services in order to cut taxes, in the hopes that low taxes will improve their business climate, may end up disappointed.
