Should We Believe Tax Foundation’s State Business Tax Rankings?

The Washington, D.C.-based Tax Foundation came out with its 2011 Business Tax Climate Index last week. The verdict: Pennsylvania ranks 26th in the nation in terms of business taxes – fairly consistent with where it has been over the past six years.

Governor Rendell touted the findings at a press conference and in a press release. The point: Pennsylvania isn't the hostile environment for business that you hear from conservative and business-aligned groups.

Not so fast. The Pennsylvania Budget and Policy Center took a closer look at the Tax Foundation's rankings, and found a number of methodological problems.

For instance, the Foundation takes into account several different types of taxes and tax features but completely ignores energy taxes. As the Center observes: “According to this definition, Pennsylvania could enact the highest natural gas severance tax in the nation without slipping a notch in the rankings.”

The Foundation also favors states with a flat income tax – like Pennsylvania has – despite the fact that states with graduated income taxes have some of the highest paying and most desirable jobs, and better job creation than Pennsylvania has seen.

Take a look at the Center's brief fact checker if you want to learn more. But the bottom line from the Center:

In most cases, a library of careful research makes clear, business taxes are not the driving force of decision making as we are led to believe. Access to markets and raw materials, a well developed system of roads and rail, a job-ready workforce, and proximity to academic centers of technological innovation are all factors that matter more than state and local taxes to the overwhelming majority of businesses. Many of these factors are financed through state and local taxes. As with many things in life, you get what you pay for.

Proceed with Caution: Tax Freedom Day Overstates Taxes Most Americans Pay

(Good article… – promoted by John Morgan)

By Sharon Ward

The Washington,D.C.-based Tax Foundation has declared April 13 Tax Freedom Day in Pennsylvania. That's how long the group says it will take Pennsylvanians to pay their 2010 tax obligations at the federal, state and local levels.

Problem is, this report takes a one-size-fits-all approach to all taxpayers – one that fits Bill Gates and Sam Walton a lot better than it fits you, me or most Americans.

By sizing its tax estimate to fit the wealthiest taxpayers, then spreading it out over the rest of us, the Tax Foundation provides a skewed look at how much we actually pay in taxes.

The calculation also relies on estimates that often change once the actual numbers come in and uses a methodology that stacks the deck against wealthy and high energy states.

Not to mention, it neglects to tell you about what you get for your tax dollars – everything from clean water and air to the roads and bridges you drive on every day.


The Foundation generates an estimate of average tax burden for Americans and for residents of each state.  The Chairman of Comcast and the mailroom clerk do not have the same income, but the Foundation assumes that to be the case in assigning a tax freedom date for all Pennsylvania taxpayers.  

The Center on Budget and Policy Priorities, using Congressional Budget Office analysis of taxpayers in 2006, finds that the Tax Foundation overstates federal taxes for 80% of taxpayers. That year, the Tax Foundation assumed an effective federal tax rate of 21% in its Tax Freedom calculation, which is higher than the rate paid by all but the top 20% of earners. The lowest 20% of taxpayers nationally paid 4.3% of their income in federal taxes and taxpayers in the middle paid 14.2% in federal taxes. Only the top 20% of taxpayers (people who earn $142,000 after deductions and exclusions) are paying 21% or more of their income in federal taxes.

 Tax Foundation Average Far More Than What Most Americans Pay in Federal Taxes

For 2010, the Tax Foundation assumes an average federal tax rate of 16.7%, the decrease being due to the Bush Era tax cuts which were focused toward people with higher incomes.

This calculation overstates the tax liability for most taxpayers and makes the “Tax Freedom Day” seem the same for us all. In fact, it reflects the date for only the top earners.


How can the Foundation report totally all taxes paid in 2010 in March? The Foundation estimates anticipated tax revenue from thousands of states and municipalities. These have proven to be hard to predict, particularly in hard economic times, making the estimated data unreliable.   

For example, a state might rank in the top 10 when the Tax Freedom report is released (to much grandstand play) only to have its ranking slip lower, much lower, when the actual numbers are reported by the U.S. Census. In 2005, the Foundation claimed 38 states had increased effective tax rates from 2000-2002; when actual data was available, that number dropped to four. Pennsylvania had three different rankings in 2002 alone.  To get a better picture of how Pennsylvania's taxes compare to other states, we rely on actual data, which is compiled by the U.S. Census and is neatly ranked by the Federation of Tax Administrators on its website.


:The Foundation's methodology stacks the deck against states with wealthier populations and high energy use.  The winners in this year's competition are not coincidentally West Virginia, Mississippi and Louisiana, which have the lowest per capita income of all states, and Alaska, which generates most of its state revenue from taxes on oil companies that the Foundation counts against other states that import Alaskan energy. Why:

  • About two-thirds of the total tax payments in the calculation are federal taxes. Because of the progressive federal income tax, wealthier people pay higher taxes. The wealthier the state, think Connecticut, the higher the ranking.
  • The Foundation allocates corporate, severance and tourism taxes to the people who pay them rather than the states that collect them. So if your state has wealthy people who own a lot of stock, they are assigned the corporate tax that the company pays in another state.  Similarly, severance taxes, although paid by energy companies in Oklahoma, Texas and West Virginia, are charged to taxpayers in Maine, New Hampshire and Vermont.

The Tax Foundation's methodology breaks the link between state action and state tax rankings. Under the Foundation's methodology, adding a severance tax will improve Pennsylvania's ranking and business climate index because that tax will be paid by residents of other states.


The Foundation's reports remind us what we are paying but not what we are paying for. This year our tax dollars have gone to pay for Social Security payments for seniors, health care for pregnant women, and a chance at college for young people. They provide funds for the development of the swine flu vaccine and new cancer treatments at our medical centers. They create jobs by funding highway and bridge repair. They also provide armor to the troops in Afghanistan and aid to the people of Haiti. And that's just federal taxes.  

The implication that Americans derive no benefit from government expenditures, as posed by the Tax Foundation Tax Freedom Day report, is inaccurate and does nothing to inform the debate.

Sharon Ward is the Director of the Pennsylvania Budget and Policy Center, a non-partisan policy research project that provides independent, credible analysis on state tax, budget and related policy matters, with attention to the impact of current or proposed policies on working families. Learn more: