Good “business climates” don’t correlate with higher wages. Investing in education does

Every year, the Tax Foundation publishes its “business tax climate” report, which scores states based on their tax policies. The report always gets a lot of press; in Illinois, which ranked 23rd with a score of 5.21 in the 2017 report, the press is usually accompanied by quotes from politicians and business leaders about how the state needs to improve its tax climate to be competitive with other states like Indiana or Wisconsin.

But should we listen?

Of course, even the Tax Foundation would probably agree that having a good “business tax climate” isn’t a goal in itself. Instead, a good climate is supposed to improve the state’s economy, and lead to more growth, more income, and more jobs.

You might think, then, that states with better “business tax climates” do better on those outcomes — the things we really care about.

Except they don’t.

Let’s start with one of the most basic indicators of an economy’s strength: state GDP per capita.

If the Tax Foundation’s scores indicated better economic performance, you would expect that states — as represented by the dots in the chart — would have consistently higher GDPs per capita as you got to the higher scores on the right side of the graph. But that’s not what you we see: Instead, there’s a great deal of variation in GDP per capita at all scores. And as you can see, the states neighboring Illinois that do better on the business climate score have significantly less productive economies.

But maybe the Tax Foundation’s business climate scores are onto something else: not GDP per capita, but growth in GDP per capita. Here’s how states have done on that measure since the Great Recession.

But in fact there’s no strong correlation there, either.

What about what people actually see in their paychecks — median household income?

Nope. How about the growth in median household income?

Okay, last try. How about growth in total jobs:

In fact, the Tax Foundation’s “business tax climate” scores have only very marginal relationships to GDP per capita; growth in GDP per capita; median household income; growth in median household income; and growth in jobs.

If scoring well on the Tax Foundation’s scorecard isn’t associated with better economic growth, income growth, or employment growth, then why should Illinois residents care?

Of course, there’s another policy indicator that does track with a better economy. It’s per student spending on education.

But it will be hard to keep up spending on students if Illinois doesn’t have revenue because we cut taxes to have a better “tax climate” according to the Tax Foundation.