The opening weeks of 2013 have seen a flurry of activity at the state level in terms of tax policy and economic development. Whether in response to the seemingly stagnant and/or regressive economic policies issuing from Washington, in attempts to stimulate business growth, or as a last-ditch effort to raise state revenues, governors and legislators across the country have busied themselves with significant initiatives that may have serious effects on companies. We have been keeping an eye on this activity and have noted a few trends to watch during the current state legislative sessions and the year ahead:
California Business Environment Proves Even More Unfriendly; Texas Sees an Opportunity
We have been following this particular state competition subplot with interest over the last year. In particular, we are mystified by the California politicians’ and news media’s tendency to pretend that serious issues are not plaguing the state. Indeed, for months it seemed as though Joe Vranich was the only person reporting the exodus of companies (and jobs and wealth) out of California due to onerous regulation, regressive taxation, and a downright hostile business environment.
A drastic change occurred in January, which we believe can be attributed to two separate tax decisions: one, the passage of Proposition 30 in November, which raised the state income tax; and two, the state Franchise Tax Board’s decision in December to cancel the partial income tax exclusion for sale of stock of a Qualified Small Business (QSB). On their own, each of these changes represents yet another California roadblock to economic growth, but given the fact that both include retroactive provisions (the new income tax is retroactive to the start of 2012 and the cancellation of the QSB exclusion is retroactive for five years), the overwhelming response from business owners and the media has been decidedly negative.
The QSB exclusion cancellation has incited a particularly strong response from individuals who could have helped California overcome its economic woes – entrepreneurs and small business owners. Many of them are now looking for more favorable business climates in other states. Given the fact that California seems to pin much of its economic future on tax income from wealthy business owners and entrepreneurs in Silicon Valley, the continued economic woes of the state appear to be a foregone conclusion.
In response, Texas governor Rick Perry is aggressively targeting California businesses via 30-second radio ads running in the Golden State. The media interest in the ads threw California Governor Jerry Brown into something of a snit, leading him to comment that the ad-buy was “not a burp. It’s barely a fart. If they want to get into the game, let them spend $25 million, then I will take them seriously.”
Perry is also currently touring California, speaking with top corporations about the benefits of locating in Texas. Chuck DeVore, a former California Assembly representative, summarized the differences between the two states in this way: “California’s taxes at the state and local level as a percentage of personal income are some 34 percent greater than in Texas. Government is about 33 percent larger as a share of the economy in California than in Texas. If California is supposed to represent all that is good about America’s liberal future, then why does it have the nation’s highest poverty rate? The Texas model produces more prosperity for more people. Open-minded Californians should ask themselves why.”
Governors Seeking to Reduce or Repeal Their State Income Tax
A recent article in the Wall Street Journal detailed the efforts by several governors, newcomers and incumbents alike, to either significantly lower or completely repeal their state’s income tax. Widely acknowledged in this effort is the fact that a reduced or absent income tax would create increasingly business-friendly conditions in these states. In order to make up the revenue, governors in states such as Louisiana, Nebraska, and North Carolina have proposed increases in their states’ sales tax rates. Moving from a tax on consumption rather than on income has historically improved economic circumstances in states adopting such a policy.
According to the American Legislative Exchange, “from 2002 to 2012, 60% of the three million net new jobs in America were created in the nine states without an income tax, though these states account for only 20% of the national population. The no-income states have [also] had more stable revenue growth.”
It will be interesting to see whether states like Louisiana and Oklahoma attempt to use revenues from taxes on energy production to help defray the cost of reducing or repealing state income tax. This strategy has already been proposed by John Kasich in Ohio.
States Using Creative Approaches to Stimulate Business Retention and Expansion
While governors in the states just mentioned are utilizing tax reform to improve the business-friendliness of their states, others are taking more drastic measures to enhance their states’ attractiveness to business owners.
Michigan, in particular, has made significant strides to improve its image in the corporate community and establish itself as fertile ground for corporate growth. Along with the historic decision last month to pass legislation making Michigan a “right to work” state, the state has also focused on business retention and expansion in an effort to strengthen the existing business community.
The state recently chose to partner with the Edward Lowe Foundation to provide academic, strategic, and financial resources to 50 companies recognized for their growth potential. Governor Rick Snyder recently announced the Michigan Strategic Fund’s plan to invest $1.1 billion to support 14 business expansions. The public/private nature of this economic development strategy and funding is indicative of the creative approach Michigan has taken to improve its position following the recession. Governor Snyder says of the project, “the fact that these companies are choosing to stay and grow in Michigan reinforces our well-earned reputation as America’s comeback state. The commitment and innovation of these job creators, coupled with the high quality of Michigan’s talent, will keep our state moving forward.”
Like Michigan, Tennessee also favors local business expansion, especially in the area of manufacturing, though their strategy relies heavily upon the state’s ability to provide attractive tax incentives. The state’s recent focus on business expansion through its “Jobs4TN” program has stimulated recent growth.
As a result, several large manufacturing expansions have recently been announced. Schrader Electronics, a tire pressure monitoring system manufacturer, has invested $10 million to expand their facility in Springfield, Tennessee; US Tsubaki Automotive will invest $1.9 million in an expansion of its Portland, Tennessee facility; and HUF North America announced a plan to invest $20 million to expand their Greenville, Tennessee facility. The state’s Jobs4TN program was cited as a leading contributor in the decision to expand.
Unemployment in Tennessee is at a 4 year low and Tennessee leads the Southeast in manufacturing job growth.
The recurring theme in the economic development strategies of these states seems to be that fostering a good relationship with the business community leads to job creation and an overall higher quality of living within the community and state. States that are failing to adopt similar stances will inevitably motivate corporations to seek alternative locations.
MAXIMUS will continue to follow these and other state tax and economic development trends as they evolve. Please contact us for more information on how we can help you add value to your company through our state and local tax, site selection, and business incentives services.
