Taxable Talk

The Tax Foundation released their 2012 State Business Tax Climate Index today. And it was no surprise to see the bottom three composed of California, New York and New Jersey. These states have high taxes overall (California adds high regulatory costs, too; however, the business climate index ignores this). Meanwhile, Wyoming, South Dakota, and Nevada are the top three states. No surprise: These states don’t have high taxes (they don’t have personal or corporate income taxes at all).

Here are the top ten:
1. Wyoming
2. South Dakota
3. Nevada
4. Alaska
5. Florida
6. New Hampshire
7. Washington
8. Montana
9. Texas
10. Utah

And the bottom 10:
41. Iowa
42. Maryland
43. Wisconsin
44. North Carolina
45. Minnesota
46. Rhode Island
47. Vermont
48. California
49. New York
50. New Jersey

For those who wonder if business pay attention to taxes, I can speak from experience: They do.

California politicians seem to think that they can raise tax rates higher and higher and higher and businesses won’t react. Bluntly, that’s wrong.

From the Leonard Letter and the South Dakota Department of Tourism and Economic Development comes word of a small firearms manufacturer named Bar-Sto Precision Machine. Located in Twentynine Palms (near Palm Springs), Bar-Sto makes auto-pistol barrels primarily for law enforcement. The company employs about 18 individuals.

But the continued increases in state taxes along with California’s high regulatory burden have impacted the privately held firm. Irv Stone, the owner of Bar-Sto, had enough. Instead of continuing in business at a lower profit margin he’s taking action. The business will be relocating to Sturgis, South Dakota.

“South Dakota is really a great place to do business,” said Irv Stone, second-generation owner of Bar-Sto. “The differences in the tax climates between California and South Dakota are night and day, and we have been treated real well by the GOED (Governor’s Office of Economic Development) and the Sturgis Area Economic Development.”

If I were to ask any of the Democratic leaders of the California legislature about Bar-Sto, I’m certain their reaction would be something like, “It’s a shame. But it’s not that relevant; after all, it’s only 18 jobs and they make guns!” Unfortunately, that’s the wrong reaction.

Yes, 18 jobs isn’t that many in California. But those 18 individuals support other wage earners through their purchases at local retailers. The loss of these 18 jobs will cascade through the work force in Twentynine Palms.

And it’s not one firm leaving the Bronze Golden State. One of my clients relocated three years ago from Laguna Hills to Jacksonville, Florida. It was just 15 jobs. Yet you need to multiply the 15 jobs lost then by a large number as more and more businesses realize that there’s a better business climate elsewhere.

There’s a solution, but it’s not one that California’s legislative leaders will like to hear. Regulations need to be cut drastically. Tax rates need to come down. Implement these actions and businesses will want to be in California and employment rates will increase. Continue down the current path—this includes such misguided actions as the current state CO₂ regulations—and more and more businesses will leave.

South Dakota has a good business climate but a rather poor actual climate (weather). Yet a second generation business owner is willing to uproot his family and move there just to avoid the high taxes and regulatory burden of California. Many other business owners will likely make similar decisions in the future, choosing nearby states with warmer climates like Arizona, Nevada, and Colorado.