Maryland’s ranking on business taxes: anywhere from 6 to 41

We are obsessed with where Maryland ranks. It’s human nature. That's why we pay attention to stories about how the Free State ranks in terms of education or business climate. However, most of the published rankings of tax levels or “business climate” don’t tell us what we think they do or what we want to know--they lack any relation to actual economic performance or to Maryland's ability to invest in a high quality of life for ourselves and our children.

Peter Fisher’s new report, “Grading Places: What do Business Climate ranking Really Tell Us?” critically examines six different measures of tax or business policies, and find them to be "deeply flawed and of no value in informing state policy."

Four of the measures are widely reported indexes that are supposed to summarize something about states’ friendliness to businesses. Fisher’s analysis discredits these indexes in three ways:

• First, he finds that many of the indicators used as components of the indexes don’t make sense.
• Second, he finds that the way the final score is computed often gives greater rate to more trivial components, so that the final rankings could be meaningless even if the individual components did have some value.
• Third, and most importantly from a practical viewpoint, Fisher shows that the results of these rankings actually have no statistically significant relationship to growth in Gross State Products, employment, wages, or poverty rates.

The other two measures are “representative firm” models. These studies use the approach of specifying a uniform, hypothetical business, and then estimating the tax bill that firm would have if it were located in any of the 50 states. Fisher finds this approach sounder. However he finds that in these studies the simplifying assumptions used make the results irrelevant for most real businesses.  

Index	Maryland’s Rank	Top State
Business Climate Indexes
US Business Policy Index (Small Business and Entrepreneurship Council)	36th	South Dakota
State Competitiveness Report (Beacon Hill Institute)	23rd	Massachusetts
State Business Tax Climate Index (Tax Foundation)	41st	Wyoming
ALEC-Laffer Economic Competitiveness Index (American Legislative Exchange Council)	32nd	Utah
Representative Firm Models
Competitiveness of State and Local Business Taxes on New Investment (Council on State Taxation/Ernst and Young)	12th (effective tax rate on capital) 25th (ETR on jobs)	Maine
Location Matters (Tax Foundation/KPMG)	46th (new firms) 8th (mature firms)	Nebraska (new firms) Wyoming (mature firms)
Reference for Comparison Purposes
Estimated effective tax rates (Council on State Taxation/Ernst and Young)	6th	Oregon

The chart shows that the ranking for Maryland varies wildly from one report to the next. And that would be true for pretty much any state. The top-ranked states in the different reports are  - literally - all over the map. And, with all due respect to the many wonderful qualities of Nebraska and South Dakota, they may not be the states where you would prefer to live and do business.

Here in Maryland, conservatives and business advocates particularly like to indict our state’s policies using the Tax Foundation’s State Business Tax Climate Index. This index combines 118 different features of state tax policy. They include the top corporate- and individual-income tax rates and also the number of tax brackets. States are rewarded for applying the sales tax to gasoline and groceries, and downgraded for applying it to business purchases. States get points for conforming with federal depreciation schedules, but lose points for having tax credits for research and development or job creation.

The main components of the Tax Foundation index are assigned weights based on the degree of variability in the component scores. This has the effect of maximizing the differences among states’ final scores. However, it also creates a nonsensical result. If the authors of the index had used the percentage of taxes associated with each category as the weight, 31 states would move up or down at least 10 places in the rankings. Maryland would be 34th instead of 41st. That doesn't mean that 34th is Maryland's correct ranking - it shows that the TF's system for calculating the ranks changes markedly when you make small changes in the methodology.

Finally, the mish-mosh of indicators has no relation to what businesses actually pay in taxes. While Maryland ranks 41st in the Tax Foundation index, we rank 6th lowest in business taxes as a share of Gross State Product.

Maryland gets low marks from TF mainly because of our progressive income tax. Maryland businesses benefit from lower-than-average property and sales taxes (much larger slices of a typical business' tax bill), but the TF's methodology gives lower weights to these factors. 

Fisher concludes that the Tax Foundation’s ratings consistently favor regressive tax structures that fall disproportionately on the poor.

About the state ranking studies in general, Fisher writes: “They display no predictive value about economic growth. They come to highly inconsistent findings among themselves…. The result is not a useful summary measure of business climate as claimed. It is at best meaningless, and at worst a state ranking manipulated to make the case for policy positions advocated by the organization sponsoring the index.”

As hard as it is, we in Maryland should ignore these slanted pseudo-scientific pieces of corporate propaganda. To build our economy for the future, we need tax policies that are adequate to fund public investments in education, infrastructure, and a high quality of life; and that are fair to working families and businesses of all sizes.