Friday, March 17, 2006

A Conservative Goes to the Library

[Welcome, Carnival of the New Jersey Bloggers and Carnival of the GOP Bloggers! Thanks for stopping by.]

Thurman Hart, the Xpatriated Texan at, writes: Ken is a liar. He's trying to fool us all! Don't let him snow you. Or words to that effect. What he really says is that my post on the State Business Tax Climate Index is "intentionally misleading" and contains "disturbingly inaccurate info."
Let me start by stating that Thurman appears to care about the subjects on which he writes, and is normally polite in his discourse, so when I saw that he had linked to my post, I was encouraged that someone from the left side of the blogosphere wanted to engage in debate on the subject. My encouragement quickly turned to disappointment when I read his introductory remarks. As a former naval officer and Naval Academy graduate, I have always tried to conduct myself honorably. To be called a liar in a public forum is a slap in the face, and is very much unappreciated. While Thurman may disagree with my conclusions about the data, none of the information provided is inaccurate (although I did make one mathematical error, as described below). It is all verifiable at the links I provided to the State Business Tax Climate Index and the Gross State Product Report. (For the true geek, the actual data behind the report on GSP is here.)
Thurman appears to have gone to the data, and includes in his post the growth rates and growth ranks for each state I listed in the top and bottom 10. What I said was that "overall US growth rate was 4.3 percent," "the top 10 states ... hit an average of 4.67 percent," and "the bottom 10 states averaged 3.44 percent." He attempts to refute my analysis by pointing out that two of the top 10 business tax climate states, "Wyoming and Alaska badly underperform," and 60% of the states in the top 10 meet or exceed the national average. In Thurman's view, 60% beating the average isn't good enough. Unfortunately, his view is based on a flawed analysis - only the two states he cites, Wyoming and Alaska, are below the 4.3% national average, while Montana equals it, as shown in this copy of his table (emphasis added).

StateTax Climate RankGrowth RateGrowth Rank
S. Dakota24.520
New Hampshire65.49

He then really confuses matters by trying to average the rankings and compare it to the median ranking, and excluding the highest percentage performer, Nevada, from the comparison to reinforce his position that the difference isn't really all that significant. Problem is, it's apparent that he averaged the growth rates, without accounting for the total growth in each of the states involved. He states that "If you separate Nevada from the rest, the average drops to 4.5." His calculation is correct for his flawed methodology, but doesn't really tell you the complete story. To do that, you have to sum the total GSPs and total growth, not average the averages.

Dollars in millions

State 2004 Total Percent Growth 03-04 03 Total 03-04 Growth Overall Tax Climate Rank
Wyoming 23,979 3.3 23,213 766 1
South Dakota 29,386 4.5 28,121 1,265 2
Alaska 34,023 3.4 32,904 1,119 3
Florida 599,068 5.9 565,692 33,376 4
Nevada 100,317 9.3 91,781 8,536 5
New Hampshire 51,871 5.4 49,213 2,658 6
Texas 884,136 4.6 845,254 38,882 7
Delaware 54,274 5.0 51,690 2,584 8
Montana 27,482 4.3 26,349 1,133 9
Oregon 128,103 4.5 122,587 5,516 10
Top 10 States 1,932,639 5.2% 1,836,804 95,835
Percentage of US 16.6%
16.4% 19.9%

With Nevada in the mix, the combined growth rate for the top 10 states is 5.2%.[1] Without Nevada, the combined growth rate falls to 5.0%. Thurman's argument doesn't hold water here. His method is akin to computing a team batting average by totalling the averages of each player, then dividing by the number of players. These states taken in the aggregate significantly outperform the nation as a whole, even if you exclude the top performer.
The next attempt to portray my analysis as "intentionally misleading" and inaccurate looked at the bottom 10 states. Thurman points out, correctly, that 40% "outperform" the US economy. His conclusion "guess," that "it must be something besides tax rates" is obviously correct, but not pursued or supported by any other data or analysis. What exactly is it then, Thurman? 70% of states with favorable business tax climates outperformed the US economy, while 60% of states with unfavorable business tax climates underperformed. I stand by my conclusion.
Let's put it another way. Look at the economic performance of the bottom 10 states, and compare with the top 10.

Dollars in millions

State 2004 Total Percent Growth 03-04 03 Total 03-04 Growth Overall Tax Climate Rank
Arkansas 80,902 5.3 76,830 4,072 41
Iowa 111,114 5.5 105,321 5,793 42
Nebraska 68,183 1.5 67,175 1,008 43
Kentucky 136,446 3.7 131,578 4,868 44
Maine 43,336 3.9 41,709 1,627 45
Vermont 21,921 4.6 20,957 964 46
Ohio 419,866 2.6 409,226 10,640 47
Rhode Island 41,679 3.5 40,270 1,409 48
New Jersey 416,053 3.4 402,372 13,681 49
New York 896,739 4.7 856,484 40,255 50
Bottom 10 States 2,236,239 3.9% 2,151,923 84,316
Percentage of US 19.2%
19.2% 17.5%

The monetary difference in growth between the top 10 and bottom 10 states is large.

2003 Economy 03-04 Growth
Top 10 $ 1,836,804 $ 95,835
Bottom 10 $ 2,151,923 $ 84,316
Delta $ (315,119) $ 11,519
% Delta -14.6% 13.7%

The top 10 states generated $95.8 billion in growth, while the bottom 10 states generated $84.3 billion in growth starting from a much larger base. Their favorable tax climate let them create 13.7% more economic growth, using 14.6% less working capital. If these were companies, in which one would you invest? The data clearly show that states with a favorable business tax climate, in general, outperform the states with unfavorable business tax climates.

Tags: New Jersey, Taxes

p.s. Thanks to Enlighten-New Jersey and New Jersey for Change for weighing in on this as well.

[1] As I put together this rebuttal, I realized that I had made a calculation error. The top 10 states did not average 4.67% growth as I had noted. As you can see from the table, the average growth was actually 5.2%. I can't account for the error (didn't save my working Excel™ file), and I stand corrected on this point. This correction will also be appended to the original.