Low Taxes Don’t Build Strong Economies

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by Gordon MacInnes

Gordon MacInnes, president of New Jersey Policy Perspective

Gordon MacInnes, president of New Jersey Policy Perspective

In the lead-up to Tuesday’s tax filing deadline, there was the usual whirlwind of commentary and assertions, some of it factual, but much of it fictional. In New Jersey, most of the discourse invariably ends up focusing on the myth that the single biggest problem facing our state’s economy is high tax rates.

A prime example of this myth-making is the Tax Foundation’s annual “State Business Tax Climate Index.” New Jersey, as usual, ranks near the cellar in this supposed ranking by the anti-tax group, coming in at 49th this year, beating only New York and being joined by California and Minnesota to form the bottom four.

The index – along with any number of similar rankings, reports and metrics produced throughout the year by various groups – fits easily into our preconceived notions about taxes in New Jersey: They’re too damn high. And who wouldn’t welcome smaller tax bills? So many of us don’t give it another thought; we ignore the specifics of the study and allow it to be used by policymakers and politicians to connect dots that don’t exist.

So what happens when we do pay attention to the specifics?

We quickly learn that “state business tax climate” has practically no connection to a much more important measurement, “state business climate.” In other words, taxes are merely a small piece of a larger puzzle and aren’t close to being the main, let alone the whole, story.

New Jersey, it is true, should be concerned about its slow recovery from the Great Recession and take note of where good jobs have gone. Given the Tax Foundation’s emphasis on “tax climate,” one might expect the states with the highest rankings to be the ones that have been taking New Jersey’s good jobs. But that’s simply not the case. Our high-paying jobs in technology and pharmaceuticals have not fled to low-tax Wyoming, South Dakota, Nevada and Alaska. Instead, they have gone to California, New York and Massachusetts. In other words, these big and growing companies like Roche and Sanofi-Aventis have knowingly moved from one high-cost, high-tax state to another.

When it comes to natural gas or oil production, New Jersey will never compete with Wyoming or Alaska. Nevada can beat us as the gambling mecca and South Dakota for processing credit card bills. But they have no chance, despite their Tax Foundation rankings, to draw the good-jobs and highly skilled people that count in this new economy. Perhaps that’s why just four Fortune 500 companies have headquarters in one of the Tax Foundation’s top four states (all four are gambling enterprises, and all four are based in Nevada). By comparison, a whopping 146 Fortune 500 – about 30 percent of America’s largest companies – have chosen to base their operations in what the Tax Foundation considers the bottom four states, including 21 in New Jersey.

New Jersey became an economic powerhouse because it has the assets to attract well-paying jobs and the people who come with them. It is in the middle of the world’s biggest market, with a transportation system that provides convenient access to New York and Philadelphia. It has a diversity of vibrant, pleasant residential communities with high-performing public schools. Its workforce is among the best educated and most skilled in the nation. New Jersey is also home to two globally recognized research universities and is a gateway state attracting striving immigrants from all over the world.

These are the magnets that make New Jersey one of the top three states in income, wealth, student achievement and the proportion of scientists, engineers, and researchers in its labor force. But like all assets, these require maintenance, modernization and new investment to retain their value. New Jersey’s policymakers need to focus on shoring up and building upon these competitive advantages, not on cutting tax rates and public services.

Gordon MacInnes is president of New Jersey Policy Perspective, a nonpartisan, nonprofit organization that conducts research on public policy issues in New Jersey.


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