2018 ALEC-Laffer State Economic Competitiveness Index: Economic Outlook Methodology
In previous editions of this report we introduced 15 policy variables that have a proven impact on the migration of capital-both investment and human-into and out of states. The end result of an equal-weighted combination of these variables is the 2018 ALEC-Laffer Economic Outlook rankings of the states. Each of these factors is influenced directly by state lawmakers through the legislative process. The 15 factors and a basic description of their purposes, sourcing and subsequent calculation methodologies are as follows:
Highest Marginal Personal Income Tax Rate
This ranking includes local taxes, if any, and any impact of federal deductibility, if allowed. A state’s largest city was used as a proxy for local tax rates. Data were drawn from Tax Analysts, Federation of Tax Administrators and individual state tax return forms. Tax rates are as of March 25, 2018.
Highest Marginal Corporate Income Tax Rate
This variable includes local taxes, if any, and includes the effect of federal deductibility, if allowed. A state’s largest city was used as a proxy for local tax rates. In the case of gross receipts or business franchise taxes, an effective tax rate was approximated using NIPA profits, rental and proprietor’s income and gross domestic product data. The Texas franchise tax is not a traditional gross receipts tax, but is instead a “margin” tax with more than one rate. A margin tax creates less distortion than does a gross receipts tax. Therefore, what we believe is the best measurement for an effective corporate tax rate for Texas is to average the 4.5176 percent measure we would use if the tax was a gross receipts tax and the 0.75 percent highest rate on its margin tax, leading to our measure of 2.63 percent. Data were drawn from Tax Analysts, Federation of Tax Administrators, individual state tax return forms and the Bureau of Economic Analysis. Tax rates are as of March 25, 2018.
Personal Income Tax Progressivity
This variable was measured as the difference between the average tax liability per $1,000 at incomes of $50,000 and $150,000. The tax liabilities were measured using a combination of effective tax rates, exemptions and deductions at both state and federal levels, which are calculations from Laffer Associates.
Property Tax Burden
This variable was calculated by taking tax revenues from property taxes per $1,000 of personal income. We have used U.S. Census Bureau data, for which the most recent year available is 2015. These data were released in October 2017.
Sales Tax Burden
This variable was calculated by taking tax revenues from sales taxes per $1,000 of personal income. Sales taxes taken into consideration include the general sales tax and specific sales taxes. We have used U.S. Census Bureau Data, for which the most recent year available is 2015. Where appropriate, gross receipts or business franchise taxes, counted as sales taxes in the Census data, were subtracted from a state’s total sales taxes in order to avoid double-counting tax burden in a state. These data were released in October 2017.
Remaining Tax Burden
This variable was calculated by taking tax revenues from all taxes-excluding personal income, corporate income (including corporate license), property, sales and severance per $1,000 of personal income. We used U.S. Census Bureau Data, for which the most recent year available is 2015. These data were released in October 2017.
Estate Or Inheritance Tax (Yes or No)
This variable assesses if a state levies an estate or inheritance tax. We chose to score states based on either a “yes” for the presence of a state-level estate or inheritance tax, or a “no” for the lack thereof. Data were drawn from McGuire Woods LLP, “State Death Tax Chart” and indicate the presence of an estate or inheritance tax as of January 1, 2018.
Recently Legislated Tax Changes
This variable calculates each state’s relative change in tax burden over a two-year period (in this case, the 2016 and 2017 legislative session) for the next fiscal year, using revenue estimates of legislated tax changes per $1,000 of personal income. This timeframe ensures that tax changes will still be reflected in a state’s ranking despite the lags in the tax revenue data. ALEC and Laffer Associates calculations used raw data from state legislative fiscal notes, state budget offices, state revenue offices and other sources, including the National Conference of State Legislators.
Debt Service As A Share Of Tax Revenue
Interest paid on debt as a percentage of total tax revenue. This information comes from 2015 U.S. Census Bureau data. These data were released in October 2017.
Public Employees Per 10,000 Residents
This variable shows the full-time equivalent public employees per 10,000 of population. This information comes from 2016 U.S. Census Bureau data. These data were released in October 2017.
Quality Of State Legal System
This variable ranks tort systems by state. Information comes from the U.S. Chamber of Commerce Institute for Legal Reform 2017 Lawsuit Climate Survey.
State Minimum Wage
Minimum wage enforced on a state-by-state basis. If a state does not have a minimum wage, we use the federal minimum wage floor. This information comes from the U.S. Department of Labor, as of January 1, 2018.
Workers’ Compensation Costs
This variable highlights the 2016 Workers’ Compensation Index Rate (cost per $100 of payroll). This survey is conducted biennially by the Oregon Department of Consumer & Business Services, Information Management Division.
Right-to-work State (Yes or No)
This variable assesses whether or not a state requires union membership for its employees. We have chosen to score states based on either a “yes” for the presence of a right-to-work law or a “no” for the lack thereof. This information comes from the National Right to Work Legal Defense and Education Foundation, Inc. Right-to-work status is as of January 1, 2018.
Tax or Expenditure Limit
States were ranked only by the number of state tax or expenditure limits in place. We measure this by i) a state expenditure limit, ii) mandatory voter approval of tax increases and iii) a supermajority requirement for tax increases. One point is awarded for each type of tax or expenditure limitation a state has. All tax or expenditure limitations measured apply directly to state government. This information comes from the Cato Institute and other sources.