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HICKS: Taxation not top factor in attracting business

March 20, 2010

My colleagues and I spend a lot of time trying to better understand and explain the geography of economic growth—most especially, what factors and policies make one place more prosperous than another.

It is a big issue that drives a lot of public spending decisions at the state and local level. Most folks worry about businesses and what they need. The issue runs much deeper.

Businesses care about taxes to be sure, but the availability of a pool of well-trained workers is at the forefront of most business-location decisions. Even in a recession, when there is an unhappy abundance of good workers in many places, businesses fret about getting and keeping the right people. Essentially, the business-location decision is based on potential-employee preferences.

From the few technical studies on the matter, I conclude that over the past two decades virtually all new residential home construction has occurred in places with above-average schools. That is simply because this is where people want to live. So, if a region doesn’t possess good schools, it ensures long-term suffering. It is largely out of the running for new industrial, commercial or residential investment. These are places in fast decline.

Local taxation does matter, but only when a resident is comparing two fairly similar places. This is where anti-tax zealots get it wrong. Both high- and low-tax places can do well. The key is having the right mix of local government spending and amenities. Here’s how it works:

Residents across the country have repeatedly demonstrated an interest in living in places with both high and low taxes. The perceived value of these taxes plays a big role. So, places with high taxes but with accompanying amenities such as great schools, parks and recreation, arts, entertainment and the like can and do quite well. Places with low taxes can also do well. Many residents don’t want public services and will flock to those places (unless the schools aren’t good).

A personal story tells it all. Before moving to Muncie, I lived in a community with much higher local taxes. Twice in three years, my community voted overwhelmingly in referendums to raise those taxes. I was one of the voters happy to stand in line to raise my own taxes because our schools were superb and we enjoyed a great community recreation center and pool, responsive local government and sidewalks. I wanted to keep all these things and so voted myself two tax increases totaling almost $100 a month.

Local government in Indiana has an easy decision (if not implementation). Our schools are, with a few exceptions, funded by the state. Money cannot drive performance. Communities must ensure that schools perform well, and that the remaining tax dollars are spent wisely on factors that improve the lifestyle quality of a community. Communities that do these well will thrive. Those that don’t won’t need to worry about getting ready for new businesses.•

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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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