Competitive Realities, Common Sense Economics and Tax Reform in the States

By at 8 May, 2013, 1:02 pm

by Raymond J. Keating

Rhode Island is not exactly known as a state that is super friendly to entrepreneurship, business and investment in terms of the policy decisions made by elected officials

Consider that Rhode Island ranked 41st, or tenth worst, on SBE Council’s “U.S. Business Policy Index 2012,” and 39th, or 12th worst, on SBE Council’s “Business Tax Index 2013.”

The message is clear: governmental costs, including taxes and regulations, are quite costly in Rhode Island.

However, there is some effort to improve the state’s competitive position in the proposed budget from Governor Lincoln Chafee.

Not only does Chafee’s budget include no tax increases, but it also proposes a positive reform on the corporate tax front.

The tax reform would broaden the base, while bringing the corporate income tax rate down from 9 percent to 7 percent over three years.

All other things being held equal, if this reform were implemented, Rhode Island’s position on both the U.S. Business Policy Index and the Business Tax Index would certainly improve.

Does this matter in the end? A recent report titled “Grading Places” published by Good Jobs First attacked SBE Council’s “U.S. Business Policy Index,” along with an assortment of other state ranking studies. The basic argument was that things like taxes don’t really matter to businesses and economic growth.

Of course, it’s not surprising that a left-leaning union group that supports big government would stake out such a position. Quite simply, such a group does not like the realities that are pointed out in SBE Council’s annual analysis regarding the negative impact that high taxes, burdensome regulations, excessive spending and other governmental costs have on entrepreneurship, business and investment.

But the reality is that SBE Council’s indexes align with common sense economics, are backed up by a wide array of studies, and are used by governors and state legislators to make policy changes that will make their states more competitive with respect to investment and business growth. 

Interestingly, the author of this Good Jobs First report does get it right when writing that the SBE Council’s U.S. Business Policy Index “is largely a measure of how much a state taxes or regulates business.” But that goes against the group’s preferences for an assortment of government programs, whether they work or not, and dismissal of taxes and regulations as important issues. It’s another attempt by those who do not understand how entrepreneurship, business and investment work to dismiss that the fact that governmental costs have very real effects on entrepreneurship, business and investment.

Perhaps it is most tellingly evident when a governor like Lincoln Chafee in a state like Rhode Island proposes reforms to reduce tax rates. After all, it’s not like Governor Chafee is some kind of hard-core, conservative Republican. As the Huffington Post recently reported, he is considering a switch from being an independent to joining the Democrats.

Both sides of the political aisle have to recognize, and are increasingly recognizing, the importance of policy decisions that make businesses – and employees – in their states more competitive, not less so. 


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.


Keating has written two new books titled Root of All Evil? A Pastor Stephen Grant Novel, and An Advent for Religious Liberty: A Pastor Stephen Grant Novel.


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