Missouri Leads Region in Low Business Taxes but Lags in Employment Growth

In recent press release, the Kansas Economic Progress Council calls Missouri the “real tax competitor” in the region due to its low business tax rates. The press release cites a report conducted by the Arkansas Chamber of Commerce which analyzed effective business tax rates in eight states (Arkansas, Kansas, Louisiana, Mississippi, Missouri, Oklahoma, Tennessee and Texas). Missouri had the lowest effective tax rate in five of eight categories the study measured.

On the surface, this looks like good news for Missouri, as low business taxes should allow the state to be more competitive than others in the region in growing and attracting businesses. But is this low-tax strategy really effective?

Presumably, low taxes would lower business costs and enable Missouri firms to charge relatively lower prices, thus increasing the demand for Missouri products. But if so, we would expect this to show up as increased output and employment in Missouri relative to other states. Unfortunately, this has not recently been the case. As the chart below illustrates, Missouri ranked last among the eight states in terms of employment growth over the past year. Employment in Missouri has grown by 1,400 for the year ending November 2011, an increase of 0.1 percent. Louisiana, on the other hand added 46,700 jobs between November 2010 and November 2011 — despite having the highest overall effective tax rate.

Most studies of business relocation find that while relative tax rates play a role, it’s a relatively minor one compared to things like the quality and availability of labor, access to markets, availability of high-quality transportation services and proximity to a cluster of businesses serving similar markets. In other words, just like people, businesses seek value -the quality of service received relative to the price paid – rather than low cost alone.

As the employment growth in higher tax states indicates, at least some growing firms are finding a better “value proposition” in states other than Missouri.

Here is a link to the KEPC press release.

Retail Sales Starting to Trend Up

During this time of year, retail sales become a key economic indicator. Early indications are that the 2011 holiday shopping season got off to a record start with consumers spending an estimated $45 billion over the weekend after Thanksgiving. Retail sales dipped during the 2007-09 recession and have been slow to recover, so this early indicator is a hopeful one. A more confident consumer will help spark what has been a slow economic recovery.

The chart below shows retail sales by quarter and a smoothed four quarter moving average. (Taxable retail sales differ from retail sales in that some items like some medical equipment and farm machinery are exempt from sales taxes so their sales are not included.) Regional retail sales peaked in mid-2008 before declining with the recession throughout 2009. The latest data available, through the 2^nd quarter of 2011, shows regional retail sales starting to trend up again, but still not at pre-recession levels.

Within the metro, 36 percent of these taxable sales ($8.98 billion) occurred in Johnson County. Jackson County was a close second with 32 percent ($8.07 billion).

On a per-capita basis, retail sales in Johnson County stands out again. Johnson County has retail sales in excess of $16,000 per person. Platte County is second with more than $15,000. All other counties are below the metro average of $12,414 per person. Retail sales taxes are a key contributor to revenues for many local governments. It would appear that this source of revenue might be heading back to the days of steady growth.

Employment Data Whiplash

In an August press release, the Bureau of Labor Statistics said that Kansas City was the second-worst metro in the country in terms of employment change. Between August 2010 and August 2011, the region lost more than 11,000 jobs. Only Atlanta had a worse year-over-year performance.

This had us scratching our heads because it is unusual for Kansas City to be at the extreme end of most economic issues. Generally we tend towards the median.

Fasten your seatbelts. After posting that loss of 11,000 jobs in August, the September data shows a robust rebound — jobs in the region are up nearly 3,000 over September 2010.

Now, an employment increase of 3,000 jobs is nothing to write home about. In fact, it is a very bad annual figure — but at least it is on the positive side of the ledger. The negative August numbers got a lot of press. September’s good news needs some coverage, too.

The chart below shows that while U.S. employment (as measured by a year-over-year percent change) turned upwards in late 2009, and stayed positive through the middle of 2010, Kansas City’s has zigged and zagged. We’ve struggled to show consistent year-over- year growth since before the recession.

Our September spike is evident on the extreme right side of the chart. We will see in coming months if this spike is an anomaly or whether we can put the neck braces away and begin to enjoy the smoother ride of a long-term employment expansion.