Pro-Business Governors Send Love Letters To the Overtaxed

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Last month Texas Governor Rick Perry showed up at a business conference in Chicago making a pitch to the attendees to consider his state for their jobs. Illinois' newspapers didn't like Perry's chutzpah in openly touting the Lone Star State in their backyard, but Perry wasn't alone. Wisconsin's Scott Walker showed up, too. And while Florida's Rick Scott didn't make it to the Prairie State, he sent a love letter to executives there which began with the salutation, "Dear Illinois Business Owner." You can guess what came next.

There's little mystery about why Illinois is generating all of this attention. Its jobs are considered vulnerable. Last week, the publication Chief Executive released its annual poll of the states that executives consider the best for business. Illinois, perennially near the bottom in this survey, finished 48th this year, behind only New York and California.

Executives who responded to the survey focused on Illinois' never-ending fiscal woes: "Illinois-a complete and utter disaster when it comes to fiscal management," said one. Added another: "Unfunded future pension and healthcare liabilities are future taxes that are at this point unknown." Corruption was a big theme among executives. Wrote one exec about Illinois' workers compensation system: "Once a claim is made, you can never end it. A business cannot overcome a fraudulent claim."

Governors are listening to this kind of talk, at least in some places where they see opportunity to swipe jobs in a slow-growth environment. Gov. Perry, for instance, famously traveled to California in February, before he ventured to Illinois in order to troll for jobs. Nearby states, including Nevada, Colorado and Utah, now consistently target California businesses in their relocation efforts. In the CEO survey, one executive summed up why: "California is getting worse, if that is even possible," he wrote. Another was more hopeful when he began by observing, "California has the best labor pool," but then he added, "and the worst government."

In our current mediocre recovery there isn't enough economic froth to lift all boats. One result is an ever more hard-hitting battle among states. Even as all of the talk in Washington has been about how much to raise taxes, states have been net tax cutters the last several years. They see taxation as at the forefront of the economic battle. When Michigan's Rick Snyder eliminated the onerous Michigan Business Tax, one of the worst taxes on businesses in the country, he framed it as a competitive necessity. The Detroit News described his effort in an editorial as, "unshackling the state from its obsolete economic past."

In Florida, Rick Scott has also taken aim at the state's corporate income tax, raising the exemption on it and in the process freeing smaller firms from its burden. A former healthcare executive, Scott wants to replace Texas as the country's top business destination. He's close. His state finished second in the CEO survey, right behind the Lone Star State. "Florida is becoming a hot bed for key industry clusters such as aviation, life science, corporate HQs and hedge funds," wrote one executive in the survey.

Some of these governors are taking their cue from Mitch Daniels, who governed Indiana from 2005 through 2012 and framed much of his agenda, from tax reform to reshaping the state bureaucracy to making Indiana a right-to-work state in terms of economic competitiveness. Daniels used to joke that it was easy to look good, being next door to Illinois. But the state's reputation soared in business circles. Indiana now is the only Midwestern or Northeastern state that consistently shows up among the best places to do business. It finished 5th in the CEO survey, ranked highest on the quality of its workforce.

Some states are reaping the rewards of long-term reforms that businesses are just catching on to. Ohio began a process in 2005 of restructuring its business taxes under former Gov. Bob Taft, and the changes have phased in over the years. The state eliminated old-fashioned corporate franchise and personal property taxes on equipment. Current Gov. John Kasich continued the momentum by repealing Ohio's estate tax. After years dwelling near the bottom of most business climate surveys, Ohio has suddenly taken huge leaps. Two years ago executives ranked it 41st among the states; this year it came in at 22nd.

Ohio has had room to maneuver thanks to a reviving economy that's benefitting from new energy jobs. In New Jersey, Gov. Christie has no such luxury. He's stabilized the budget and refused to raise taxes after $5 billion in tax increases during the administrations of Jim McGreevey and Jon Corzine.

But Christie is also faced with legacy costs that will weigh down the state's budget for years, including the highest per capita debt-load in the nation and a pension system that the state shortchanged billions of dollars in the last decade. As a result, businesses have an almost schizophrenic view of the state: "New Jersey actually seems like it is trying to get a little bit more business friendly. But historically, I have never dealt with a state that had more of a ‘gotcha' attitude and treated businesses like they were guilty until proven innocent," wrote one chief executive in the study.

More and more executives are aware that merely avoiding setting up shop in high-tax states is no longer sufficient. Desperate for revenues, some states are now trying to extend what is known as their tax nexus, that is, the definition of presence in a state the triggers tax liability.

Traditionally, a company needed to be physically present to be subject to a state's taxes. But now merely having a web site hosted on a server in a state would be considered sufficient to generate tax nexus in about a third of states, according to a 2012 survey by Bloomberg. And 21 states said that attending job fairs or otherwise recruiting employees in their state would trigger taxes on an out-of-state firm.

This has made some businesses ever more wary. As one CEO wrote about business unfriendly New York, which has been most aggressive at trying to extend its tax arm: "We are seriously going to consider whether we allow employees to travel to or participate in events in that state. We can't afford for NY to become a tax nexus for us just because our employees participate in a conference in NY or the like."

It's getting ugly out there, indeed.

Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

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