Less is More
By Justing Owen Drew Johnson explains how Tennessee could stand less action from its government when it comes to increasing its business-friendly status. This article originally appeared in Business TN Magazine. How does Tennessee’s business climate compare with other states across America? The short answer: “not bad.” In a recent Fortune Small Business ranking, Tennessee was the 13th most business-friendly state in the nation. The Tax Foundation, in its annual study of state business climates, ranked Tennessee. Two factors spurred Tennessee’s solid rankings: The state’s status as a right-to-work state and the lack of a state income tax. Tennessee is a right-to-work state, which means that the government does not force employees to join a union or pay dues in order to work at companies with labor unions. States with compulsory unionism face more work stoppages, a smaller pool of qualified workers and, generally, more regulations for business owners. This translates into decreased efficiency and productivity. As a result, right-to-work states like Tennessee have a tremendous competitive advantage in attracting business owners since they can avoid union-generated regulatory snags while enjoying a more dynamic, flexible workforce. The Volunteer State’s lack of a personal income tax is the second component that makes it among the most business-friendly states in America. A personal income tax can be particularly agonizing for small business owners. Nearly 90% of businesses—such as sole proprietorships and partnerships—file taxes as individuals, paying personal income tax rates rather than business tax rates. Naturally, then, a state with no personal income tax is a haven for enterprising small businesses. Tennessee is one of only five states—along with Florida, South Dakota, Texas and Wyoming—that are both right-to-work and income tax-free. This is an almost sure-fire recipe for a welcoming business climate. Each of the other four states scored in the top-10 in the Fortune Small Business ranking and in the top-6 in the Tax Foundation report. Why, then, does Tennessee fare worse than the four other right-to-work, income tax-free states? High sales taxes fueled by out-of-control government spending, along with state government’s misguided attempts to “help” businesses appear to be to blame. Only two states in America have higher state sales tax rates than Tennessee. Certainly a higher sales tax is an understandable byproduct of not collecting an income tax. Florida, South Dakota, Texas and Wyoming, however, all have lower sales tax rates than Tennessee. The reason why Tennessee needs a high sales tax is that state government spending is growing faster in the Volunteer State than in its four fellow right-to-work, income tax-free states. In fact, the Tennessee state budget has ballooned from $17 billion to more than $26 billion over the past six years. Finally, the state must address its economic development policies that often do more harm than good to the business climate of the Tennessee. Each year, Tennessee’s elected official dole out nearly $200 million in corporate welfare in hopes of luring new business or expanding existing companies. Yet these business subsidies rarely fuel economic growth since they generally fund expansions or relocations that would have taken place even without a dime of taxpayer-funded government incentives. State leaders turn a blind eye to the troubling fact that economic development is nothing more than bribery made possible because the government plunders the profits of many less fortunate—and less well-connected—companies to favor a chosen few. Instead of stealing from one company to subsidize another, the state’s “economic development” policy should consist of developing the economy through low tax and regulatory burdens for all businesses. Tennessee’s welcoming business climate was not created by what state government does. Instead, it is a result of what state government does not do, such as tax income or protect sluggish unions from competition. If state leaders want Tennessee to become even more hospitable for both new entrepreneurs and existing businesses, they should do even less: spend less, regulate less and tax less. If government can get out the private sector’s way, the state now known as the “Volunteer State” may soon also be acknowledged as America’s “Most Business-Friendly State,” as well. Drew Johnson is the president of the Tennessee Center for Policy Research.