12 October 2003

California has been hard to miss in the news these days. A recent article in The Economist about that state’s economic troubles mentioned, in passing, a report by the Washington-based Tax Foundation and their recently-published background paper on the “State Business Tax Climate Index.”[1] The Economist picked up on this report because, according to the Tax Foundation’s analysis, California ranks 49th out of the 50 US states as having the least friendly tax structure for businesses, surpassed only by Mississippi.[2] That ranking is another hurdle for Governor Schwarzenegger to jump.

However, that mention of Mississippi got me thinking. Since I wrote last week about the possible desirability of smaller or more efficient government, I was fascinated to see a state like Mississippi at the bottom of this list. Surely Mississippi should be near the top, along with other Southern states – the states that had once formed the secessionist Confederate States of America during the Civil War, advocating for greater states’ rights and a less onerous tax structures (along with the right to own slaves). In fact, nevermind the past; it seems equally obvious that in 2003 a good, conservative southern state like Mississippi should have a welcoming, unburdensome tax structure for businesses.

Apparently not. Reviewing the Tax Foundation’s report, I looked specifically for the rankings for the 11 states that were part of the Confederacy, along with the three border states that did not secede from the Union but shared some of the Confederate sympathies for what constituted good government. Here is how these states are ranked in the report:

With 50 states in the US, here is a quick breakdown of these rankings into three tiers:
States in the top 3rd – ranked between 1 – 16: 4 (4, counting the border states)
States in the middle 3rd – ranked between 17 – 33: 4 (5, counting the border states)
States in the bottom 3rd – ranked between 34 – 50: 3 (5, counting the border states)

As shown above, the report places 4 of these states in the top third of US states with positive business tax environments, while 4 are in the middle third and 3 are in the bottom third. Depending on one’s perspective – is the glass half-full, or half-empty? - one can see this either as suggesting that the former Confederate states are doing well in creating an appealing business environment (72.7% are in the top two thirds), or that they’re not (63.6% are in the bottom two thirds). Add in the three border states of Missouri, Maryland, and Kentucky (two of which are quite “southern” by normal American definitions) and the picture changes slightly, with one more state falling into the middle third, and two additional states into the bottom third – making the top two-thirds and the bottom two-thirds equal at 71%.

In other words, of the states that once shared sympathies in seeking relief from what they saw as the burdensome and meddlesome US federal government, some 140 years later they are on different paths in the size and scope of the taxes they place on their businesses and citizens. There is no doubt that American society and politics over the last half-century have changed dramatically when contrasted with the period between the Civil War and the end of World War II. For many years, Democrats (typically less tax wary) were in control of much of the south, until Republican presidents Nixon and Reagan began to break up those voting blocks, and freed some of the southern states of their historic, Civil War era affiliations with the Democratic party. (In recent years, Republican leadership in a few of these states may have helped push them to the top of the list, but the Foundation report does not include specific data on when some states saw changes in their tax codes take effect or how their rankings may have changed against previous years.)

Perhaps affiliation with the Confederacy should not be a predictor of economic success, or at least of a state’s economic environment, all these years later. However, it is revealing to see how evenly divided these states are in terms of the tax policies they have pursued – and since tax policy is often an indicator of perspectives on governance (since governments receive their funds from taxes), the data suggests that not all of these conservative, leave-us-alone southern states have created leave-us-alone environments for their businesses.