Sushi Money

A great deal of news happening in the financial world and not easy to keep up with it all. With so many opinions and viewpoints out there it’s easy to get lost in themes of change and concern about the economy. But make no bones about it, the economy is struggling. On top of energy and gas price concerns we’ve seen fires, floods and tornadoes change lives. And in many states folks are just trying to keep or find a job. The rest of us just focus on what we know, and continue working to manage and improve our lives each day.

But the policies, laws and regulations that our elected and appointed leaders make have great impact over time as well. Lately energy and food price inflation has a lot of folks spooked, including the Fed. We should hear more about Fed policy today, and the Fed is bound to look very hard at the threat of long term inflation while still being concerned about the country tipping into recession. Which is it? It’s both because that’s where we are today.

But nowhere are economic issues more challenging right now than in places like Michigan where people are lined up for jobs like pictures from the Great Depression.

“Michigan’s agony will be front and center in the runup to this fall’s Presidential election. It figures to be a more fiercely contested battleground for Barack Obama and John McCain than even Ohio or Florida. The job picture, says DCC’s Perry, is worse this time around than in 1980, the last time unemployment was so high. “Then, workers were being laid off, but these jobs are being eliminated,” Perry points out. “And they are going at a much faster rate than we can replace them.” According to Michigan Governor Jennifer Granholm, the state has lost more than 400,000 jobs in the past seven years. May’s numbers alone show a loss of 50,000 jobs.”

The national economy is struggling for a lot of reasons, but I think there are things we must consider across the nation that either contribute to economic strength, or take away from potential economic growth. From my perspective, few things are as important to consider as tax policies and the tax climate within the nation and respective states.

Tax laws and regulations make an enormous difference in this country. Personal taxes, property taxes, business taxes and more. Michigan for example has been wrestling to find a sound business tax policy for years now, and it hasn’t helped to foster growth or provide help to consumers.

While the economy is struggling and we are teetering on a recession, it’s wise to remember that businesses and employed workers provide the foundation and backbone for all the prosperity and growth we see in this great nation. Hence business tax climate is a critical issue to consider.

While job losses are mounting in various sectors, especially finance, the auto industry and the airlines, the Fed will have to consider the contractionary implications of raising interest rates over the next year. If using money to lend, build and borrow becomes more expensive for business over time, then tax climate also is an increasingly sensitive factor in conjunction with related economic costs.

The Tax Foundation, a non-partisan tax research group based in Washington D.C., conducts a lot of research into tax issues in the U.S., and has done so since the Great Depression. The Tax Foundation’s Business Tax Climate Index provides some excellent considerations for policymakers and political leaders in a late 2007 background paper:

“How much states collect in taxes is critical, but how they take it is also important. In other words, quite apart from whether a state’s total tax burden is higher than in other states, it can enact (and many states do) a set of tax laws that cause great damage to the economy.”

“The modern market is characterized by mobile capital and labor. Therefore, companies will locate where they have the greatest compet­itive advantage. States with the best tax systems will be most competitive in attracting new busi­nesses and be the most effective at generating economic and employment growth.”

“Although the market is now global, the Department of Labor reports that most mass job relocations are from one U.S. state to another rather than to an overseas location. This means that state lawmakers must be aware of how their states’ business climates stack up to others in their region and nationwide.”

Does that partly explain the mass exodus of business from some western states such as California to other states such as Arizona over the past decades? What about Michigan? Or the U.S. as a whole? If we reduce the competitive advantage for business here in America, jobs are going to go where businesses can make the most money. In many ways today it’s inevitable and challenging to compete with workers paid so much less overseas. Some say globalization is wonderful and some see it as destructive. Either way it’s here to stay and the world is getting smaller.

But the business and service economy in the U.S. is being reinvented every day. And our goal and mandate should be on how we capitalize upon our strengths and improve them over time. We are much more geared to a service economy than an industrial economy these days, and manufacturing jobs are not nearly as common as they used to be. The shortage of high quality jobs and workers will continue to be a problem in the U.S. And the worker shortage may only increase in technology sectors.

Jobs are out there for qualified IT workers, but much of the nation is still in that transition from a manufacturing base to a knowledge-worker core. Education and training will be vital in the years ahead, and partnership between government and public and private industry will be essential to help train, re-train and educate our future workers. And I strongly believe we need to work hand-in-hand with business to help them find and train quality workers.

The Tax Foundation has framed it pretty well, and what we consider over the long term is vital for continued economic growth:

Lawmakers create these deals under the banner of job creation and economic develop­ment, but the truth is that if a state needs to offer such packages, it is most likely covering for a woeful business climate plagued by bad tax policy. A far more effective approach is to systematically improve the business tax cli­mate for the long term. When assessing which changes to make, lawmakers need to remem­ber these two rules:

1. Taxes matter to business. Taxes affect busi­ness decisions, job creation and retention, plant location, competitiveness, and the long-term health of a state’s economy. Most importantly, taxes diminish profits. If taxes take a larger portion of profits, that cost is passed along to either consumers (through higher prices), workers (through lower wages or fewer jobs), or shareholders (through lower dividends or share value). Thus a state with lower tax costs will be more attractive to business investment, and more likely to experience economic growth.
2. States do not enact tax changes (increases or cuts) in a vacuum. Every tax law will in some way change a state’s competitive position relative to its immediate neighbors, its geographic region, and even globally. Ultimately it will affect the state’s national standing as a place to live and to do business. Entrepreneurial states can take advan­tage of the tax increases of their neighbors to lure businesses out of high-tax states.

On top of all the economic challenges we face, tax policy is a very large factor. And although the Tax Foundation is a non-partison research group, there are stark differences between the political parties regarding the tax policy debate.

Quite simply, we hear the Democrats talking more about raising taxes while the Republicans talk more about reducing taxes and making this decade’s tax cuts permanent. It’s both a philosophical and a practical debate about economics that neither political party can really adhere to uniformly over the long term. But although taxes are a fact of life in the U.S. lower taxes are usually a good thing for all of us, especially families and businesses.

History has shown that those nations, states and cities who provide a more tax-friendly business climate promote much stronger growth and employment over time. And I would submit that a new focus on human capital development is paramount- hence greater education and training initiatives are critical. Over the long term we also need stronger advocates for balanced business tax policies and greater understanding for the burden that taxes place on businesses and consumers. Talking tough on increasing taxes will serve no one well in this economy, or this election year.

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