What Are Nevada and Florida Doing Wrong?

One way states with high unemployment can create jobs is to make their economies more conducive to business. And one way to make firms happy is to require them to pay less money in taxes. After all, if a firm would face a lower tax rate in one state versus another, then they will have higher profits if income is declared in the state with lower taxes. Yet, a few states that with the most favorable business tax climates also have some of the worst job markets. How can that be?

This month, the Tax Foundation released (.pdf) its latest list of state rankings of business tax climate. Here's its map that sums things up:

business tax map 2010-10.png

White is good, and dark blue is bad. Its top-5 includes South Dakota, Alaska, Wyoming, Nevada, and Florida, in that order. New York was the worst, followed by California, New Jersey, Connecticut, and Ohio.

While there wouldn't necessarily be a direct correlation to business taxes and unemployment, you might think that a states' labor market would recover relatively quickly if its tax system is very conducive to business. Yet, two states, in particular, slaughter that logic: Nevada and Florida. Here's a chart that breaks things down:

tax unemployment rank 2010-10.png

First, several states make a lot of sense here. Other than New York, all of the five-worst states are also in the top-20 for highest unemployment rates, with California the third-worst. New York may have been an exception here because a huge portion of its labor market, New York City, was essentially bailed out with the banks.

Moreover, the top-three best states also seem to make sense. They all have relatively low unemployment rates, especially South Dakota and Wyoming. But then there are the enigmas Nevada and Florida.

Not only are these states two of the very worst labor markets, but they've been getting steadily worse as the job markets of some other states with very high unemployment rates, like Rhode Island and Michigan, have begun to recover. Florida and Nevada also happen to offer relatively high qualities of life, as they both have warm weather. So it shouldn't be difficult to convince employees to live there. How could they be the fourth and fifth best states for business tax burden but also the fist and fourth worst for unemployment?

There are a few possible explanations. One is that these two states were very reliant on their housing markets. Since that industry continues to struggle, jobs have too. So it's possible that these sectors are still losing jobs faster than others are adding them.

Another possibility is that these states don't entice businesses to relocate as aggressively as others. But actually, if a state provides one-off tax incentives to some firms and not others, the Tax Foundation's might treat it as a more harmful political climate for taxes, which works against a state's ranking. But that's different than if a state agrees to, say, partner with a firm to take on some of the infrastructure costs associated with relocating.

These two states must be doing something wrong. Maybe they aren't working hard enough to get the word out to businesses that they would fare better in their tax systems, or maybe they don't offer enough carrots to take on some of their relocation and infrastructure costs. If the tax systems of these two states are really that great, then these states should be able to push down their unemployment rates relatively quickly by luring businesses into their borders.