2020 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 2020 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 variable 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 January 1, 2020.
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 4.6560 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 2.70 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 January 1, 2020.
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. Tax rates are as of January 1, 2020.
Property Tax Burden
This variable was calculated by taking tax revenues from state and local property taxes per $1,000 of personal income. We have used U.S. Census Bureau data, for which the most recent year available is 2017. These data were released in October 2019.
Sales Tax Burden
This variable was calculated by taking tax revenues from state and local 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 2017. 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 2019.
Remaining Tax Burden
This variable was calculated by taking tax revenues from state and local 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 2017. These data were released in October 2019.
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, 2020.
Recently Legislated Tax Changes
This variable calculates each state’s relative change in tax burden over a two-year period (in this case, the 2018 and 2019 legislative sessions) for the next fiscal year, using revenue estimates of legislated tax changes per $1,000 of personal income. Personal income data are drawn from 2018. 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
This variable calculates interest paid on state and local debt as a percentage of state and local total tax revenue. This information comes from 2017 U.S. Census Bureau data. These data were released in October 2019.
Public Employees Per 10,000 Residents
This variable shows the full-time equivalent state and local public employees per 10,000 of population. This information comes from 2018 U.S. Census Bureau data. These data were released in June 2019.
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 2019 Lawsuit Climate Survey.
State Minimum Wage
This variable indicates 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 of $7.25 per hour. This information comes from the U.S. Department of Labor, as of January 1, 2020.
Workers’ Compensation Costs
This variable highlights the 2018 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 allows employees to be forced to pay union dues as a condition of employment. States receive their rank 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, 2020.
Tax or Expenditure Limit
This variable measures the influence of tax and expenditure limits on state tax revenue and spending. States were ranked 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. This information comes from the National Association of State Budget Officers, American Enterprise Institute, and other sources.
2020 ALEC-Laffer State Economic Competitiveness Index: Economic Performance Methodology
Gross Domestic Product Growth
This variable was calculated by observing state GDP growth figures over 10 years from 2008-2018. A percentage change formula over the 10-year timeframe generates a cumulative GDP growth figure for each state. Data are drawn from the Bureau of Economic Analysis, which were last updated in November 2019.
Cumulative Domestic Migration
This variable was a summation of net in-migration of individuals for each state over a 10-year period from 2009-2018. Data are drawn from the U.S. Census Bureau, which were last revised in December 2019.
Non-Farm Employment Growth
This variable was calculated by observing state non-farm employment growth figures over a 10-year period, from 2008-2018. A percentage change formula over the 10-year timeframe generates a decadal non-farm employment growth rate for each state. Data are drawn from the Bureau of Labor Statistics, which were last revised in March 2019.