CEOs Favor Pro-Growth, Low-Tax States

CHIEF EXECUTIVE CANVASED 511 CEOs across the U.S. asking them to evaluate four or more states with which they are directly familiar. They were asked to rate each with respect to three categories they regard as highly important: taxes and regulations; quality of the workforce; and living environment, including such considerations as quality of education, cost of living, affordable housing, social amenities and crime rates.

After Texas and Florida, North Carolina edged out Tennessee for the third and fourth ranking, with Georgia, Indiana, Louisiana, Nevada, Arizona and South Carolina filling out the fifth through 10th places respectively. Following California and New York, business leaders see Illinois, New Jersey, Massachusetts and Connecticut as the worst places, largely due to the perception that they are high-tax and over-regulated environments.

But there are degrees of disenchantment. One of the biggest factors in CEOs’ thinking is the attitude that local and state authorities have toward business and the perceived capriciousness of regulations, particularly those imposed on smaller firms least able to bear the costs. In this respect, if it were possible to rank 60th out of 50 states, California would likely rank No. 61. Joseph Vranich, an expert on corporate relocations, has counted more than 200 major companies with tens of thousands of employees that left the Golden State over the last four years.

While Google, Apple, Intel and HP are not likely to leave, neither do they expand locally if they can help it. Google server farms tend to be built in lower-tax states like Nevada, Arizona and Iowa. Were it not for its climate and excellent university system, it is a wonder that more California companies don’t leave. For example, voters and politicians in San Francisco and Oakland approved new minimum wage mandates. Predictably, the move to alleviate income inequality has had the opposite effect on area service providers. Restaurants have been cutting back employment or even closing their doors. Many restauranteurs told the San Francisco Chronicle that the $15 minimum wage puts them in a position where they are no longer able to absorb the costs of doing business.

Such a phenomenon would be unthinkable in, say, Indianapolis, Indiana; Columbus, Ohio; or Madison, Wisconsin, where politicians are grounded in the day-to-day realities of how disincentives and costs affect employment. However, California is a lotus land free of feedback loops—at least any that Sacramento recognizes.

Texas continues its economic miracle despite the hit it has taken with the slowdown in oil fracking. Since the recession began in December 2007, 1.2 million net jobs have been created in Texas. Only 700,000 net jobs were created in the other 49 states combined. However, the slowdown in the energy industry has also taken its toll in job creation, with Texas dropping to fourth in the month of January and California rising to the top owing to a Bureau of Labor Statistics (BLS) revision. Texas and other top-producing oil states have been hurt by a 50 percent-plus drop in the price of crude oil since July. As a result, oil-related companies have announced tens of thousands of job cuts and reductions in capital spending.

But California’s labor force—18.9 million—is 43 percent larger than Texas’ 13.2 million, so the 12-month job gain for California translates into 3.2 percent, while Texas saw a 3.5 percent employment increase. Moreover, Texas’ unemployment rate of 4.4 percent is 40 percent lower than California’s 6.9 percent, one of the nation’s highest. Industrial development is helping diversify second-ranked Florida’s economy. Each year, the Sunshine State edges closer to its goal of overtaking Texas as the best state for business.

This year, it bests its rival in its rating for living environment, but the Lone Star state still runs ahead in the other two categories—tax and regulation and workforce quality.

As Florida continues its transformation beyond tourism, it will chip away at the gap. According to a Wells Fargo Securities report, both the amount of expansion and the growth in construction payrolls have been significant. The industries expanding the fastest are not directly related to tourism and are some of the best-paid industries in the state. Technology is becoming an increasingly important driver of the state’s growth.

What is most evident in the survey is how four states—Louisiana, Wisconsin, Ohio and Indiana—dramatically transformed themselves over the last six years in the eyes of CEOs. In 2010, Louisiana ranked 40th; now it’s No. 7, demonstrating that even a state with entrenched bureaucracy and a poor tax structure can improve its appeal when determined to change its policies.

In addition to the above four, Michigan is making slow but steady progress. Detroit’s meltdown has overshadowed the muscular economic recovery in this region, driven by a manufacturing and technology renaissance. Many states have come to understand that states don’t just compete with one another for business and jobs. As Gov. John Kasich told The Wall Street Journal last January, “In Ohio, we’re in a contest against Europe, Asia and the rest of the world, so we have to keep our taxes low.”

The common thread among more successful regions is the tax-cutting wave that is sweeping the states. Most governors recognize that states with lower taxes on work, investing and business activity are winning the competition for jobs and businesses.

In his 2014 book, An Inquiry into the Nature and Causes of the Wealth of States,” economist Arthur Laffer studied the 11 states that had instituted an income tax over the last 50 years. Without exception, all declined as a percentage share of GDP. New Jersey (No. 46) is an interesting example. In 1965 it had a balanced budget and neither a sales tax or an income tax. Today, it ranks among the biggest losers, with a cumulative $21 billion loss in personal AGI from 1993 to 2010, as people who leave take their incomes with them.

New Jersey has many natural wonders, including proximity to New York, a highly skilled workforce and above-average educational attainment, but a high-cost, high-tax region cannot stop out- migration. As Laffer says, “high taxes don’t redistribute income; they redistribute people. Americans are more mobile than ever, and as demonstrated throughout the past two decades, not at all averse to moving away from states with oppressive income tax climates and into pro-growth states that offer more attractive economic environments that are beneficial to both businesses and individuals alike.”