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Business climate rankings don’t give the full story

Clark Biegler
Oct 10, 2013

Business climate studies are a popular way to rank states. The Tax Foundation in Washington, D.C. just released its 2014 State Business Tax Climate Index ranking Minnesota 47th, while Forbes recently named Minnesota as the 8th best state for business.

As these two rankings show, various business climate ranking methods produce wildly different results that don’t necessarily predict how well a state’s economy is performing, as a comprehensive analysis from Good Jobs Firsthas found.

The Star Tribune’s Adam Belz noted that, “Despite its low ranking [on the Tax Foundation’s index], Minnesota’s economy was the fifth-fastest growing in the nation in 2012 and the unemployment rate in August was 5.1 percent, compared with a 7.3 percent U.S. jobless rate.”

The Tax Foundation’s State Business Tax Climate Index takes a scorecard approach that measures states based on what tax policies are in place. This is a good methodology if the question is whether states have implemented the policies that the Tax Foundation prefers, but it is not a measure of whether businesses are actually succeeding in that state.

The Tax Foundation ranks states solely according to taxes – corporate, income, sales, property, and unemployment insurance. The index favors a regressive tax system, one where low- and middle-income residents pay a higher share of their incomes in taxes than high-income residents.

The Tax Foundation’s ranking does not account for the quality of the workforce, access to transportation hubs, or other factors that also contribute to business success; and over-emphasizes the importance of state and local taxes, which represent a small percentage of total business costs.

What it boils down to is this: when evaluating a particular business climate ranking, it’s worth a closer look at what specifically it is measuring. Economic performance is the truest measure of whether Minnesota has been right to invest in our workforce and quality of life and to fund those investments in a relatively less regressive way.

-Clark Biegler