Marketplace of Ideas Blog

The newest state economic climate comparison gives Wisconsin a mixed grade.

The American Legislative Exchange Council–Laffer State Economic Competitiveness Index, published as Rich States, Poor States, gives two grades to the 50 states — one for economic performance, one for economic outlook. (Before we go on, as with all these rankings, a low ranking is good, and a high ranking is bad.)

The first ranking — which includes per-capita personal income growth, domestic migration (people moving in vs. people moving out), and non-farm payroll employment growth, all between 1997 and 2007 — ranks Wisconsin 41st overall. Our state ranked 42nd in income growth, 25th in domestic migration, and 35th in employment growth over the aforementioned decade. Interestingly, that 41st ranking is better than most of the rest of the Midwest — Minnesota ranked 34th, but Missouri ranked 44th, Iowa ranked 45th, Indiana ranked 47th, Illinois ranked 48th, Ohio ranked 49th and Michigan ranked 50th.

The second ranking — based on 15 factors, most of which are tax-related (maximum rates, progressivity of income taxes, tax burdens per $1,000 of personal income, and the existence of tax expenditure limits), but also including government employees per 10,000 population, the state’s liability system, the state minimum wage, Worker Compensation costs and whether the state is a right-to-work state — ranks Wisconsin 27th, up from 33rd in 2008. Wisconsin ranks below Indiana (17th) and Missouri (23rd), but better than Michigan (34th), Iowa (35th), Minnesota (40th), Illinois (44th) and Ohio (45th).

Wisconsin’s economic outlook rankings are all over the place, both in terms of pass (a state minimum wage not higher than the federal minimum wage) and fail (we’re not a right-to-work state, but we do have an estate tax) and in rankings, ranging from ninth in public employees per 10,000 population to 42nd in property tax burden per $1,000 personal income.

ALEC reports that its top 10 states in economic outlook outperform the remaining 40 in gross state product growth (85.1 percent among the top 10, 66.8 percent for all 50 states, 59.3 percent for the bottom 10), personal income growth (87.9 percent, 69.5 percent, 60.7 percent), per-capital income growth (55.9 percent, 53.6 percent and 52.3 percent) and population growth (20.4 percent, 9.9 percent, 4.4 percent), net migration (5.3 percent, 0.9 percent, minus-3.3 percent), non-farm payroll employment growth (22.6 percent, 13.3 percent, 9.3 percent) and unemployment (3.8 percent, 4.3 percent, 4.5 percent). Wisconsin, by the way, has seen 53.3 percent gross state product growth, 57.3 percent personal income growth, 46.5 percent per-capita income growth, 6.2 percent population growth, 0.8 percent net migration, and 6 percent non-farm employment growth between 1997 and 2007, with a 2007 unemployment rate of 5 percent — worse than the national average in all measures.

Rich States, Poor States also includes a guide to effective taxation that Gov. James Doyle and our legislators, regardless of party, should have read before the budget process and its more than $2 billion in tax increases began:

• Tax something and you get less of it. Tax something less and you get more of it.
• Taxes create a wedge between the cost of working and the rewards of working.
• Increasing tax rates will not lead to a dollar-for-dollar increase in tax revenues. But reducing tax rates to encourage production will lead to less than a dollar-for-dollar decrease in tax revenues.
• Tax rates that are too high may lead to a reduction in tax receipts (the Laffer curve).
• The more mobile the factors being taxed, the larger the response to a change in tax rates. (The example ALEC uses is a business that builds a factory whose taxes are then suddenly increased. ALEC suggests the business won’t leave immediately for a lower-taxed state, but will wait until, for example, equipment at a plant needs servicing, and then leave.)
• Raising tax rates on one source of revenue will reduce tax revenue from other sources. Reducing tax rates on one activity will increase taxes generated from other activities.
• “An economically efficient tax system has a sensible, broad tax base and a low tax rate.”
• If taxes are raised in location A and lowered in location B, producers and manufacturers will have greater incentive to move from A to B. (Sound like Thomas Industries?)

ALEC also suggests creating a constitutional amendment to require two-thirds approval of tax or fee increases beyond what’s required to pay interest on state debt. Given that Republicans, when they controlled both houses of the Legislature, failed to pass the Taxpayer Bill of Rights, and given the sudden fondness for this state’s former automatic gas tax increases, I wouldn’t expect this to happen in this state in my lifetime.

You’ll note that this comparison is strictly an economic comparison and doesn’t include such comparisons found in other rankings as quality of life, school quality or worker education levels. As such, it measures the effects of legislative decisions on a state’s economy. A decade of decisions by Republicans and Democrats resulted in well-below-average economic performance for not just Wisconsin, but the entire Midwest.

The economic outlook, unfortunately, doesn’t include the tax increases already signed into law or those proposed in the 2009–11 budget, which makes one think Wisconsin’s ranking is overoptimistic. Imagine how different tax policy would be if, instead of evaluating by how much tax revenue was brought in, the success, or lack thereof, of tax policy was based on how the economy did — personal income increases, gross state product growth, and employment growth and unemployment rates, for example.

Unless you like hurricanes (of the meteorological or libationary variety), few people in this state would consider Louisiana to be preferable to Wisconsin. And yet, as Sen. Joe Leibham (R–Sheboygan) points out, Thomas Industries chose to move 250 jobs south instead of moving 40 jobs north. What does that tell you?