08.12.2011 0

America’s Business Climate 2.0: Taxes, Regulations, and the New Economy

By Marvin Mandel and Ellen R. Sauerbrey – The National Governor’s Association annual meeting concluded last month with a closing address by New York Times columnist Thomas Friedman who writes that there is an urgent need for government to do four things to stem what he characterizes as America’s slow decline:  spend, cut, tax and invest.   If those sound like competing priorities, that’s because they are.

What swept the vast majority of new Governors of both parties into office last year, were not subjective ideals on how to position their states to win the new economy.   Instead, they ran on encouraging private sector job growth by ending harmful tax and regulatory policies and improving the business climate image, a perception largely formed by a dozen organizations ranging from media outlets, to think tanks and financial services firms which evaluate and compare states.

New York Governor Andrew Cuomo is aggressively taking on state spending, going so far as to look for politically-difficult cost savings in budget drivers such as public education.  Why?  Because New York’s notoriously bad business climate is not winning the future, either in the new economy or the existing one.

“New York has no future as the tax capital of the nation,” he said.  “Our young people will not stay.  Our business will not come.”

Coloradans deserve a government that promotes economic development, says Governor John Hickenlooper, who is pushing the bureaucracy to “know when to regulate, how to regulate, and when to get out of the way.”

Three-term Governor Rick Perry is talking up the Texas “economic juggernaut.”  Information technology companies have been shifting personnel over the last few years from high-taxed California to Texas.   Perry says Texas “is ready to compete for a bigger piece of that pie.”

Yet there is a movement to redefine “business climate,” and this is somehow supposed to reduce interstate economic development rivalries.  For example, the Kauffman Foundation’s “State New Economy Index” concludes that “too many communities and states still see their economic competitors as next door, as opposed to halfway around the world.”  Voiced by a cadre of journalists, politicians and think tanks, the narrative generally goes along the lines that states must attract scientists and engineers, move towards a “green economy” or otherwise become adept at technological innovation.

Other business climate studies focus on competing here at home, analyzing tax and regulatory policies. The American Legislative Exchange Council’s “Rich States Poor States” report measures regulatory burdens and taxation relative to personal income.  According to ALEC, “If A and B are two locations, and if taxes are raised in B and lowered in A, producers and manufacturers will have a greater incentive to move from B to A.”

Virginia ranks third in this report and Maryland is 21st.  ALEC would see a fundamental economic development challenge — the Maryland “B” state is at a competitive disadvantage with its Virginia “A” neighbor.  We’ve seen just such a scenario play out in our home state in recent years as Maryland has lost out to Virginia in corporate relocations including Hilton Hotels, Northrop Grumman and Volkswagen North America.

Vying with his Texas counterpart as a perennial favorite in business climate rankings, Virginia Governor Bob McDonnell understands that to first compete abroad, states have to compete at home. CNBC’s annual “America’s Top States for Business,” released in June, ranks Virginia number one.  About the CNBC report, McDonnell said, “We are telling the Virginia story to job-creators from Beijing to Boston.”

Whatever the economic development challenges are in a particular state, changing tax and regulatory policy will have an almost immediate effect on improving the business climate, and this is under the direct control of governors and legislators.  The private sector builds the laboratories of technology and innovation that create prosperity.  Under our system of federalism, the states are the laboratories of democracy.  There are clear differences between these two laboratories. Let each do what each does best.

Wisconsin Governor Scott Walker promoted “Open for Business” road signs along the border with Minnesota and Illinois, a realization that competition for economic development and jobs starts not at the Atlantic and Pacific Oceans but at the state line.  A growing number of governors are getting that message and are making their states strong — and our nation stronger — in the process.

The writers are Co-chairs of Maryland Business for Responsive Government, a bipartisan research and education organization.  Marvin Mandel is a former two-term Democratic Governor; Ellen Sauerbrey is a two-time Republican nominee for Governor. Both are guest contributors to the Liberty Features Syndicate. They may be reached at info@mbrg.org.

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