Low Tax States Don't Equal High Job States

The Department of Labor has released its state-by-state labor numbers: joblessness had declined in 24 states, risen in 13 (and Washington DC) and remained largely unchanged in 13 compared to last month's figures.

While good news that a number of states are improving, there is also much to take from those that are continuing to struggle. The disparity also provides an opportunity for those who believe in the central tenet of federalism – that states are laboratories of experiment to see what works and what doesn’t.

As one explores the common threads among improving states, current Republican rhetoric, with its particularly heavy emphasis on tax policy, may cloud the issue. The numbers suggest a much larger, more complex story.

A fundamental problem comes with trying to directly relate unemployment to tax policy alone.

For example, Nevada, leading the nation in unemployment, has the fourth best tax environment, according to the Tax Foundation. Of the states without an income tax (nine in total), six have lower unemployment than the national average (Alaska, New Hampshire, South Dakota, Texas, Wyoming), two are roughly keeping the national average (Tennessee and Washington) and two are above (Florida and Nevada). Of the seven states with a flat income tax, three are at the national average, three are below, and one (Michigan) is above.

Texas, which has produced 37 percent of all American jobs since the economy, is, according to CNBC’s 2010 numbers, the 30th most expensive state to do business, but still the best. The Wall Street Journal emphasizes the thorough nature of Texas’ appeal: “Capital—both human and investment—is highly mobile, and it migrates all the time to the places where the opportunities are larger and the burdens are lower. Texas has no state income tax. Its regulatory conditions are contained and flexible. It is fiscally responsible and government is small. Its right-to-work law doesn't impose unions on businesses or employees.”

California, still plagued by double-digit unemployment, is a clear example for how this works the other way around. Despite, according to CNBC, being first in the nation in “Technology and Innovation” and “Access to Capital” it ranks 32nd in overall competitiveness. Rhode Island, ranked 49th overall due to high business costs (45th), poor transportation (48th) and hostility towards business (48th), is another case of poor state management. Overall, lack of competitiveness has culminated in an unemployment rate 1.8 percent above the national average.

This is not to say that tax policy is not an incredibly important variable. South Dakota, Wyoming, Montana and New Hampshire (ranked first, third, sixth and seventh1respectively by the Tax Foundation) all are below the national average. But, it’s imperative to emphasize the multitude of factors contributing to prosperity.

A pro-growth tax policy is a necessary but not sufficient element of success. Important aspects, like infrastructure, quality/education of workforce, quality of life, are as necessary to a well-functioning state. However, this common sense is often marginalized in current GOP rhetoric.

If Republicans continue to portray tax-cuts as “magic bullets”, the greater debate will be lost and the above issues will fall into the hands of the left’s public-based solutions. Republicans must cast aside the intellectual crutch of “cut taxes, cut regulation” if they hope to display the breadth of economic understanding necessary to win an election.

These economic realities provide good and bad news for the Republican Party. The good news is that the famous Coolidge expression, “What is good for business, is good for America,” holds true. The bad news is that what is good for business is much further reaching than the answers provided by the GOP so far.