Tax Policy on the Business and Distributional Scales
Indiana is pretty familiar with the Tax Foundation's Business Tax Climate Index. The index measures which state tax systems are the friendliest to businesses. We like their ranking because they like us. Indiana ranks 8th on their 2015 list. We hope that being so business-friendly will encourage business expansion in our state, leading to more jobs and higher pay.
We're less familiar with a different ranking of state taxes by the Institute on Taxation and Economic Policy (ITEP). They rank state tax systems based on their effects on the distribution of income. They don't like Indiana very much. We're 42nd on their 2015 list. According to ITEP, in every state lower income people pay a bigger share of their incomes to taxes than do higher income people. Indiana's tax system does that more than most.
Both organizations publish descriptions of their methods and results. Search online for "Tax Climate Index" or "ITEP Who Pays," and you'll find them.
It's no surprise that a state that does well on one list ranks low on the other. Being business-friendly means low taxes on business income. Business owners are often higher-income earners. Low taxes on people with higher incomes may mean a greater burden on lower-income people.
Being distribution-friendly means lower taxes on low-income people and higher taxes on high-income people. If those high incomes are earned from businesses, the tax system may burden business income, which could discourage expansion.
A lot of states are like Indiana, high on the business list and low on the distribution list. South Dakota is second on the business list and 48th on the distribution list. Florida is fifth on business and 50th on distribution. A lot of states show the reverse. California is 48th on the business list and third on the distribution list. Vermont is 46th on business and sixth on distribution.
Illinois is 31st on the Tax Foundation's business list. Indiana's tax code is much friendlier to business. Is that because Illinois' tax code ranks high on the distribution list? Nope. Illinois is 47th on ITEP's list. Illinois is unfriendly to both business and low-income people, ranking below Indiana on both scales.
Earlier this month the governor of Illinois said he would "rip the economic guts out of Indiana." Hey, governor: you and what tax code?
There are six other states that rank lower than Indiana on both lists: Arizona, Kansas, Pennsylvania, Tennessee, Texas and Washington (state). Maybe we need "come-to-Indiana" billboards in those states, too.
The business tax people and the distribution tax people usually are at each other's throats. So it's amazing that there are seven states that rank in the top 20 of both groups' lists. Seven states (mostly) satisfy the policy agendas of businesses and low-income people.
There is one state in the top 10 of both lists. Where is this place cheered by both business and distributional interests, by conservatives and liberals, by Rs and Ds alike? Where is this tax paradise?
Montana is sixth on the Tax Foundation's business climate list and eighth on ITEP's income distribution list.
How do they accomplish this miracle? Mostly by never having adopted a state sales tax. The Tax Foundation points out the business-discouraging faults of every tax. If one whole tax is missing, one set of faults is missing, too. ITEP points out that sales taxes are among the most regressive taxes. Low-income people spend more of their incomes, so a bigger share goes to sales taxes. Eliminate the sales tax, and the rest of the tax system looks better.
There are other features that both groups like. Montana is in the top 20 in each of the separate taxes that the Tax Foundation evaluates. ITEP appreciates Montana's reliance on its progressive individual income tax.
Montana's tax system may not be one for Indiana to emulate. Probably it's too late to get rid of the sales tax. And the Tax Foundation and the Institute on Taxation and Economic Policy are just two of many groups that publish state rankings. Each group has its own agenda.
Still, Montana's tax system shows that it's possible to please two interest groups with very different tax-policy goals.