Politics & Policy

Cowboy-Up Economics

It's no coincidence that the states with the lowest tax rates are leading the U.S. in employment growth.

‘Cowboy up” is western slang for facing your problems like a man, and it applies very well to the states that are generating high rates of job creation by way of low taxation.

#ad#In Wyoming, for instance, where the corporate and individual income-tax rates are zero, the cowboy-up philosophy is paying huge dividends: Last year, the state led the nation in nonfarm payroll employment growth. (It also led the U.S. in 2001.)

Nonfarm aggregate employment is a broad measure of a state’s economy. And few would disagree that the states consistently failing to equal or exceed regional and national employment averages have unhealthy economies. One example is Michigan, which has recorded six straight years of job losses.

The key question is: Why? Why is Michigan such an economic laggard? Short answer: the state’s anti-competitive tax and regulatory structure and failure to cowboy up.

Every governor must acknowledge and face economic problems if he or she hopes to resolve them. Unfortunately, Michigan’s Democratic Gov. Jennifer Granholm has resorted to the logical fallacy of poisoning the well and blaming others — including President George W. Bush and former Gov. John Engler — for the state’s single-state recession.

Granholm, an attorney, should know better. Like all governors, she inherited some economic success stories as well as some problems — including an employment market that peaked in June 2000. But Granholm should not refuse to work with those who have credible ideas for fixing Michigan’s collapsing labor market, ideas such as lowering state taxes and reducing the size of government.

For example, Granholm inherited Michigan’s single-business tax, a European-style value-added tax that places Michigan at a competitive disadvantage with other states. Last year, in a losing effort, Granholm fought against SBT repeal. Today, SBT opponents are proposing cutting government spending to balance the budget, while Granholm is backing a new state sales tax on services.

If Granholm truly wants to reverse Michigan’s lackluster jobs trend she needs to cowboy up — like officials in zero-tax Nevada and Wyoming have done.

Nevada led the U.S. in job creation across the 2003-05 period, and placed second only to Wyoming in 2006. According to the U.S. Bureau of Labor Statistics, Wyoming’s nonfarm employment expanded 5.3 percent last year, followed by Nevada at 4.8 percent. U.S. nonfarm employment, by comparison, grew 1.66 percent.

But the American West, overall, is a job-producing standout. Every state in the 13-state region, except California (which had job growth of only 1.14 percent in 2006), beat the U.S. job-creation rate last year. Included here is Washington (jobs growth of 2.51 percent), another state not levying corporate or state income taxes.

Indeed, “cowboy up” is at the heart of this Western trend.

Wyoming, like Nevada, continues to attract capital from high-tax states like California, which has an 8.84 percent corporate tax rate and a top individual tax rate of 9.3 percent. Jackson Hole, Wyoming, and metropolitan areas in Nevada like Las Vegas and Lake Tahoe, are full of economic refugees from California. (For further state-to-state comparisons, see the corporate and individual tax-rate charts compiled by the Federation of Tax Administrators.)

The West is also attracting workers from Michigan, the state with the worst job-creation record in the nation. Michigan’s economy has shed jobs for six consecutive years, an even more dismal statistic in a period of breakout U.S. economic expansion.

Jennifer Granholm is the only second-term governor currently in office who has presided over job losses every year in office. Predictably, Louisiana and Mississippi, thanks to the ravages of Hurricane Katrina, joined Michigan in 2005 in posting net annual job losses. But unlike Michigan, both states rebounded in 2006, recording employment gains greater than the U.S. rate: Louisiana’s labor market expanded 3.4 percent that year; Mississippi’s job creation was 2.6 percent.

It’s as if a category-5 hurricane has been sitting on Michigan for the last six years.

Skilled workers in Michigan are fleeing westward, in particular to Wyoming. And the sad fact is, the Michigan jobs blight is manmade — politician-made — and not some freak of nature. Even sadder, Detroit was once known as the “Arsenal of Democracy,” the city that played such a vital role for the allies in World War II. And guess what: Michigan did not have a state corporate or individual income tax until 1967.

Tax-rate levels are critical when it comes to job creation and economic growth. Policymakers in low-growth states (hint-hint, Michigan) would benefit from studying the zero-tax policies of Wyoming and Nevada, places where the cowboy-up philosophy is a proven winner.

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