Chain of Thought

When tax and logistics climates clash

One of the biggest challenges for any student in high school or grade school is speech. Not speech class, but the speech he or she has to make to their folks, explaining their report card. That occurred to me as I tried to figure out the recently released 2011 Manufacturing and Logistics Report Card, prepared by Ball State's Center for Business and Economic Research (CBER).

This report reviews several areas of economic development for each of the 50 states, including manufacturing and logistics health, human capital, cost of benefits, global position and diversification of industries, state level productivity and innovation, tax climate and venture capital activities.

Ohio, my own state, got a mixed report:

Manufacturing: A

Logistics: A

Human Capital: C

Benefit Costs: D

Global Reach: A

Productivity/Innovation: C-

Tax Climate: D-

Diversification: B-

Venture Capital: C

I kind of took this report card personally. I was proud of my state's manufacturing and logistics performance, but bummed about the D- in tax climate. Judging by the state taxes I pay, it didn't surprise me—but then, how does that jibe with our stellar manufacturing and logistics performance?

“Great question,” CBER Director Michael Hicks responded when I asked him. “The grades on manufacturing and logistics alone are based primarily on the current state of the industry (size, share of economy and value-added measures). For logistics, this also includes the level and type of investment in transportation infrastructure. The purpose for including these measurements in a scorecard which includes all the other variables such as tax, innovation, etc. is that there are factors that explain the health of these sectors that are not explained satisfactorily in this type of scorecard. Chief among these are agglomeration economies, which can only be observed by looking at clustering or through sophisticated statistical modeling.”

In plain English, states with poor tax systems (higher taxes) are likely to put pressure ultimately on expansion of manufacturing firms. Clustering together with other like businesses might make firms a bit less sensitive to tax rates, but over time, Hicks believes, higher tax places will see some erosion of their manufacturing, all things being equal.

Sounds like he's saying Ohio's A's in logistics and manufacturing might not last. But in looking at how other states scored, I tried looking for patterns. Iowa and Minnesota, like Ohio, got A's in manufacturing and logistics and D's or F's in tax climate. On the other hand, some that got D's and F's in manufacturing and logistics got A's in tax climate (Montana, Utah and Alaska). One might think that a state with a healthy tax climate would be more likely to have healthy logistics and manufacturing. Not according to CBER.

One major factor to keep in mind: it came out of Ball State…which is located where? Indiana. How did that state score in manufacturing and logistics? A and A. Tax climate? A.

But let me share a little information I picked up from the Ohio Department of Development's Policy Research and Strategic Planning Office: Ohio offers the lowest capital investment tax rate in the Midwest region of the United States, and the lowest per capita state tax burden among its neighboring states. Because there are no taxes on gross receipts to sales made and/or shipped outside of the state, logistics/distribution companies in Ohio can easily do business across state lines without added costs.

So D- for Ohio's tax climate, Ball State? Tell that to Ohio's Department of Development.

Cheer up, Iowa and Minnesota. With a little help from your Chambers of Commerce all three of our states could Ace Ball State's tax test next year. And let's keep up the good work on logistics.

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