SALON
Tuesday, May 12, 2015 01:35 PM EDT
Republicans don't believe in global warming
science, but love unscientific tax "science" that benefits the rich
Paul Rosenberg
Republican governors’
woeful economic records are
crippling what would normally be the strongest chance the party has to
capture the White House. Historically, the statehouse-to-White-House
pathway is far more viable than the route through the Senate, yet GOP
governors’ records offer little to run on in a general election. Healthy
state-level growth is—at least traditionally—a basic resume
requirement.
I
have argued that the GOP’s perceived advantage on the economy is
entirely a matter of illusion, citing Erik Zuesse’s “They’re Not Even
Close: The Democratic vs. Republican Economic Records,” 1910-2010,
a point that Salon’s Sean McElwee has since reinforced,
citing “11 reasons why America does worse under the GOP.” But the
national picture is not the only place to look for such evidence. The
failure of GOP ideology on the state level deserves further scrutiny as
well, particularly with so many governors and ex-governors in the race.
The 2012 study
“Selling Snake Oil To The States,”
which demolished the tax-slashing prescription package offered by ALEC
(the American Legislative Exchange Council) and right-wing economist
Arthur Laffer, helps to define the parameters of GOP state-level
economic policy.
But ALEC is only one of several such
organizations, and Peter Fisher, who co-authored the “Snake Oil” study,
has studied their work as a whole, and found it dismally deficient. In
2005, he authored a book published by the Economic Policy Institute,
“Grading Places: What Do the Business Climate Rankings Really Tell
Us?,” then in 2013, Good Jobs First
published his updated analyis,
which covered four state rankings still being published, as well as two
more sophisticated guides which at least try to simplistically model
actual tax costs—though with severely limited success.
The
four indexes are the The ALEC-Laffer Economic Competitiveness Index;
the Tax Foundation’s State Business Tax Climate Index; the Beacon Hill
Institute’s State Competitiveness Report; and the Small Business and
Entrepreneurship Council’s U.S. Business Policy Index. The last combines
a broad range of 46 factors—but only 12 dealing with tax progressivity
actually matter in the rankings—just one indication of how much
confusion reigns in this field. Another indication: states ranking high
in one index often rank low in another. Most importantly, there’s no
relation between scoring well and actual economic performance. The
entire “business climate” cottage industry which drives so much of the
GOP’s state-level economic agenda is nothing but baseless
pseudo-science.
Thus, ironically, at the same time that Republicans are at war with
actual
climate science, they are routinely invoking economic articles of
faith, reflected in the bogus field of “business climate” studies which
directly guides their policies on the state level, and defines their
economic outlook more generally. It’s a commonplace for Republicans like
John Boehner to profess ignorance regarding climate science, while
pretending to know that “every proposal that has come out of this
administration to deal with climate change involves hurting our economy
and killing American jobs.” Not only have recently emerging fossil fuel
industry troubles, coupled with renewable advances, which I wrote about
recently, made Boehner’s job-killing claims look foolish on their face,
the entire background for such economic self-assurance—reflected both in
conservative orthodoxy and far too much of “conventional wisdom”—turns
out to be nothing but hot air.
In the introduction to “Grading
Places,” Fisher writes, “The six reports we review in detail all purport
to measure the competitiveness of a state for business activity, and
all emphasize the importance of taxes. Three focus exclusively on some
measure of state taxes on business; the others include nontax factors
but state tax policy still plays a prominent role in their
calculations.”
But as Fisher later notes, the reality is that tax
policy plays a decidedly minor role in most business decision-making,
because taxes themselves are a relatively minor cost: “[A]ll state and
local taxes on businesses combined (including corporate and individual
income taxes, sales taxes, plus local property taxes) represent only
about 1.8 percent of total business costs on average for all states.”
That’s clearly not a dominant consideration, but the
kinds of
taxes these groups focus on represent an even smaller share: “Corporate
income taxes, in turn, are only about 9.5 percent of that 1.8 percent,
or 0.17 percent, according to one estimate.”
There’s even a good
case that these “pro-business” groups are exactly the opposite of what
they purport to be, given how the needs of established big businesses
and the far more numerous small startups diverge. “In fact, a state tax
system that relies heavily on progressive income taxes is probably the
most supportive of new business and innovation,” Fisher writes.
“Start-ups and young firms typically lose money, and owe no income taxes
as a result. By contrast, firms must pay sales and property taxes no
matter what their level of profitability, so states that depend more
heavily on those taxes create a heavier burden on start-ups and young
businesses in those critical formative years.”
Even if the role of
taxes weren’t inflated and misrepresented, profound problems would
still remain with these rating guides. “An examination of the four most
prominent ‘business climate’ ratings of state tax systems finds them to
be deeply flawed and of no value to informing state policy,” Fisher says
in the executive summary, before ticking through a list of glaring
flaws, starting with perhaps the most fundamental: “They produce state
rankings that bear little relation to actual taxes paid in one state
versus another.” Astonishing, perhaps, but when interviewed, Fisher
quickly confirmed it. “These are purporting to measure business climate,
or in some cases, more narrowly, business tax climate. But even when
they’re just narrowly focused on business tax climate, they’re not
measuring what businesses actually pay,” he said. They often total up
“points” for various features of the tax code—number and width of
brackets, for example—rather than looking directly at actual tax bills
paid.
It’s not rocket science, Fisher pointed out. “There are
fairly simple ways of coming up with a rough average of how much
business tax are in one state for another. You just look at business
taxes collected as a percent of the state GDP for example or personal
income.” But that’s not what the “business climate” indexes do. “They
often bear so little correlation that you really wonder what they are
measuring,” Fisher said. “If their goal is to measure how much
businesses paying what state versus another, why don’t they just rely on
one of these other approaches instead cobbling together this index
number that turns out to not being much?”
As already mentioned, the
U.S. Business Policy Index
combines a broad range of 46 factors, but only 12 dealing with tax
progressivity actually matter in the rankings. This little tidbit
deserves more scrutiny for the insight it provides into how this field
of “study” actually works, and what a real pseudo-science looks like.
More specifically, the report states, “When the 12 measures of
progressive taxes are combined, the state scores range from zero (in
Wyoming, with no individual or corporate income taxes and no estate or
inheritance tax) to 73.4 (in California).” In sharp contrast, “The
ranges between the lowest and highest scores on the other categories is a
fraction of this amount, ranging from just 3.7 points for the labor
policy variables to 11.8 points for government regulation.” Indeed, a
chart showing how states score from lowest to highest shows virtually no
visible trend for any of the other categories.
In real social
science—like all science—a major goal is to isolate the smallest number
of factors that produce a given outcome. First you eliminate the
extraneous factors, then you can study how the factors that matter
interact with one another. That’s how knowledge gets accumulated over
time. There’s nothing wrong with studying 46 factors in the first place,
as the USBPI does, but there’s a
big problem with continuing
to study them when most of them turn out to be irrelevant. Of course, in
this case, nothing real is being measured—only an abstract aggregate
“score”. But the principle remains the same: factors that only
contribute noise to the score should be eliminated from calculating it.
And yet, the USBPI remains overloaded with 34 items and all of three
categories which are minor distractions at best, if not entirely
irrelevant.
The reason for this should be obvious: the USBPI was created for
political
purposes, to serve multiple related, but not identical, agendas. The
one that really matters is promoting regressive taxation, so the rest
turn out not to really matter. But saying so outright would clash with
the political agenda of crafting a broader appeal. So the index
continues to include a large majority of irrelevant items. It goes
without saying that nothing remotely similar happens with climate
science. In climate science, tests of statistical significance are run
all the time, and factors that fail to make the cut are eliminated from
causal accounts—at least until some new evidence for them can be found.
While
four of the measures are simple indexes, two are a bit more
sophisticated, examples of what are called “represenative firm models,”
prepared by brand-name accounting firms: the Council on State Taxation’s
Competitiveness of State and Local Business Taxes on New Investment, and the Tax Foundation’s
Location Matters. As
Fisher wrote, “These mathematical models allow for more complexity and
nuance because they acknowledge that different companies and facilities
vary greatly in how they interact with tax codes and they are aimed at
measuring how tax systems impact plant expansions or relocations.” But
he went on to say “Unfortunately, both models have serious flaws and
fail to take full advantage of the methodology,” and elsewhere, he
wrote, “both are weakened by simplifying assumptions that lead to
misleading results.” When I interviewed him, Fisher was even more
critical of what they had done.
“I probably shouldn’t have used
the term mathematical model, when I think about it,” Fisher said,
“because all they’ve really done in these other studies is reduce the
state corporate income tax form, and property tax law to spreadsheet
formulas…. It’s like tax preparation software to you buy.” Put simply,
the measures “model” the tax bill paid by “representative firms” in each
state—with some glaring omissions (COST ignores tax incentives, for
example)—but
not the economic conditions in which they would do
business, as the term “model” would seem to imply. The COST model
“assumes every facility sells five percent of its output in-state,
whether it is located in, say, California or North Dakota,” for example.
Out-of-state sales levels are also set arbitrarily and unrealistically
as well.
Still, compared to the four index measures, “that is a
much better yardstick of what businesses are actually going to pay,”
Fisher said. While the tax codes may not be completely modeled, and the
business assumptions may be unrealistic in some ways, it still looks
much better than how the index are created.
As Fisher described
the typical process of analyzing tax features, “You just take each one
by itself and add them up. So you say ‘We’re going to give you five
points for having only two tax brackets. We’re going to give you three
points for having a top rate under 10%. We’re going to give you one
point for not having a state minimum wage.’ Then you add the points up,
and you might have 50, 75, 100 different tax features, and you just add
them all up and you’ve got a number. Well, that’s pretty meaningless
number, and it’s pretty arbitrary how you decide to weight those
different features.” Suddenly, modeling a “representative firm” that
sells as much in state in California as it does in North Dakota starts
to look pretty good—even though it’s still far from being realistic.
These models, though, are still far from the standard form of analysis used in social science.
This doesn’t mean that indexes are
necessarily
misguided. Fisher goes on to say, “To a significant degree, the
legitimacy of an index depends on how well it mimics a more
sophisticated statistical approach.” However, “As we shall see, the
indexes reviewed here fail this test.”
Another fundamental problem
is the very existence of a “business climate,” as a meaningful concept,
which Fisher also remarks on:
It is not clear that
the very concept of “business climate” or “competitiveness index” for an
entire state or metro area makes sense to begin with. Charles Skoro has
argued that “the usefulness of the business climate concept depends on
the existence of a set of indicators that are measurable, that have substantial effects on business outcomes, and that are truly generic—they influence business activity in a more or less uniform manner regardless of industry, region, or time period.”
As
with the more limited example of the USBPI, there may be strong
political reasons why talk about a “business climate” has a broad
appeal, but that doesn’t tell us anything about whether such general
“business climates” actually exist. What may be good for one particular
industry—at least in the short run—may not be very helpful for
businesses in general, and could even be
disadvantageous for some other industries. There is simply no advance guarantee, one way or the other.
Fisher continues:
Others
have made similar arguments: that the factors important to location
and expansion decisions are industry-specific, and that the conditions
conducive to growth can vary tremendously within a state.
They
also argue—and we agree—that metropolitan regions, not states, are
the meaningful unit of competition for business investment decisions.
New York City bears little resemblance to Buffalo; the same is true for
El Paso and Houston and for San Jose and San Bernardino.
In short, the entire enterprise may simply be ill-conceived. On the other hand, there
are
some kinds of policies which do make broad-based sense—but they reflect
a much broader mindset than just thinking about “business climate.”
Elsewhere, Fisher writes, “In the long run of economic history, the only
way to achieve broadly shared prosperity is to increase productivity.
Only if more goods and services are produced per capita, can more goods
and services can be
consumed per capita (or the work week shortened without reducing the standard of living).”
He
goes on to identify four ways this can be achieved: First, capital
investments “make the economy more productive,” second, technological
advances “increase the efficiency of production,” create “new uses of
existing resources” or “new products and services,” third, “investments
in ‘human capital’” (education and training) make labor more productive,
and fourth, an economy’s overall productivity is maximized via full
employment and “a labor force that remains healthy and on the job.” Such
are the prescriptions for making an economy as productive as possible.
But what makes sense for society as a whole is not necessarily what
makes sense for individual actors, particularly greedy, selfish,
sociopathic ones. And that’s arguably the whole purpose behind the
“business climate” racket—to bamboozle the public into seeing the world
the way that greedy, selfish corporate sociopaths do.
One final
point drives home just how bogus “business climate” studies are: their
lack of development in response to criticism over time. Once again, the
contrast with
real climate science is instructive. In the
climate modeling field, there has been long-term interaction between
model-building and criticisms, most notably focused on important
elements of the physical climate system which were missing from climate
models at various stages. Over time, more elements were added to
climate models, their integration has improved, and the models have
become more fine-grained, producing specific outputs for smaller and
smaller geographic areas. All these have been clearly recognizable signs
of progress,. Researchers have also undertaken significant studies
relying on the results of a whole suite of models, reflecting the fact
that there are reliable similarities in their results. This is what a
successful model-development process looks like.
In contrast,
Fisher said, “I see very little change in these models over the years….
In fact, the accompanying text in these reports hardly changes
year-to-year. So, for example, the latest Tax Foundation report that
came out in December last year still has exactly the same wording
attacking my 2005 first edition of
Grading Places. So they
haven’t even bothered to note the second edition. They haven’t
acknowledged any of the specific criticisms of their model, really.”
The
indexes themselves aren’t improved, in part because it would interfere
with their propaganda usefulness, Fisher believes. “The measures stay
the same. I think, in part, because when they issue a new one they want
to say, ‘Well look what North Carolina jumped 15 places in the ranking
this year. Why? Because they cut all these taxes.’” That sort of
comparison would be harder to make if the index itself were to change.
“So in part I think it’s because they’re not really serious attempts to
measure something meaningful. They have a policy agenda in mind, and the
way they constructed it serves that policy agenda, and they have no
real incentive to change. Part of it is because they just want to have a
consistent one from year-to-year, they don’t want to admit, probably,
that there’s anything wrong with the earlier ones, and they want to be
able to make year-to-year comparisons.”
In short, there’s nothing
serious involved in what they do. “They are basically recipes for state
fiscal austerity, for cutting government spending across the board, and
reducing taxes on business, but also on individuals,” Fisher summarized.
That’s what they are designed to advocate for, so why bother with
anything else?
Speaking specifically about ALEC’s index, he noted,
“They acknowledged no positive role for government whatsoever. There’s
nothing the government does that’s important in promoting economic
growth, it only enters negatively. So, the more government employees you
have, the worse your ranking. It doesn’t matter what they’re doing.
They could be elementary school teachers, firefighters, it doesn’t
matter, the more you have, the worse your economy is going to be
according to these measures.”
It is, in short, a rationale for
austerity without end—which simply cannot work. “It’s largely states
that are responsible for education at all levels, not the federal
government. It’s largely states they have responsibility—states and
localities—have responsibility for investing in infrastructure. You
can’t have an economy without a transportation system, without public
utilities, water and sewage, high-speed Internet in rural areas,
everybody acknowledges they’re important. And so, when you undercut the
funding source for those kinds of public investment, you’re undercutting
the ability of the state to increase productivity and support economic
growth in the long run.”
But that’s the playbook that state-level
Republicans have embraced, legislators and governors alike. Which is
just one more reason why today’s crop of presidential wannabes are so
weak on the economy. The political press won’t tell you so, of course.
But it’s a profound vulnerability just waiting to be exploited—and it’s
only likely to get worse as different GOP governors and ex-governors
compete with one another in the GOP primary.
Fisher leaves us with
one final thought worth stressing—the short-term strategies these
measures push are, in the long-run, ultimately destructive of income
growth and wealth-creation:
Increase in productivity
is what is required for increase in incomes. And what we see with these
indexes is they’re promoting, almost exclusively, a competitive strategy
of your state capturing a bigger share of investment, this really what
it’s about. How can you, in effect, steal capital investments from your
neighbors? That does nothing for the national economy, to have states
competing for investment that’s going to occur somewhere anyway. What it
does is undercut their ability to fund that traditional state role in
supporting economic growth through investments in education,
infrastructure, and even health.
In short, it’s not a
prescription for growing an economy of the future. But some version of
it or another will be the GOP vision for 2016.
Paul Rosenberg is a California-based writer/activist,
senior editor for Random Lengths News, and a columnist for Al Jazeera
English. Follow him on Twitter at @PaulHRosenberg.
