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Another Tax Competitiveness Index Fails To Prove Anything

If you have read our blog before, by now you should be familiar with the variety of “tax climate” or “business friendly” indexes put out by groups like the Tax Foundation. And you should also know that these indexes have repeatedly failed to show any connectionbetween their scores and state economic performance.

Peter Fisher at the Iowa Policy Project takes a look at one more, the The ALEC-Laffer State Economic Competitiveness Index, which was developed by Dr. Arthur Laffer and others and published by the American Legislative Exchange Council (ALEC) as a guide to state policies that promote economic growth.. The index favors the usual suspects in all of these indexes: reduction or abolition of progressive taxes, fewer government services, weaker or non-existent unions.
 
In honor of the five year anniversary of the index, Peter Fisher compares the ALEC ranking of states with their performance over the past 5 years in terms of growth in state GDP (Gross Domestic Product), growth in nonfarm employment, growth in per capita income, and growth in population.
 
And the results,
 
graph
 
“Simply put, the ALEC Outlook Ranking fails to predict economic performance. There is virtually no relation between the ranking in 2007 and a state’s five-year rate of growth in GDP; the correlation is 0.02, almost zero. On another measure, the correlation is only slightly stronger, but in the opposite direction (-0.06): The lower a state was ranked on the A-L Index the better it did in terms of job growth. Other trends were stronger but again in the opposite direction: the less “competitive” a state according to ALEC the more per capita income grew (see chart above).”

Take a look at Peter’s piece over at the Iowa Policy Project for the full breakdown. He concludes, the low-tax, small government policies favored by ALEC and other groups, “…are not a recipe for growth and prosperity. If anything, they are quite the opposite: They are a recipe for economic inequality, low wages, and stagnant incomes that at the same time deprive state and local governments of the revenue needed to maintain the public infrastructure and education systems that are the underpinnings of long term economic growth.” 

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