APPENDIXAppendix2014 ALEC-Laffer State Economic CompetitivenessIndex: Economic Outlook MethodologyIn previous editions of this report we introduced 15 policy variables that have a proven impact onthe migration of capital—both investment and human—into and out of states. The end result of anequally weighted combination of these variables is the 2014 ALEC-Laffer Economic Outlook rankingsof the states. Each of these factors is influenced directly by state lawmakers through the legislativeprocess. The 15 factors and a basic description of their purposes, sourcing, and subsequent calculationmethodologies are as follows:HIGHEST MARGINAL PERSONAL INCOMETAX RATEThis ranking includes local taxes, if any, and anyimpact of federal deductibility, if allowed. Astate’s largest city was used as a proxy for localtax rates. Data were drawn from: Tax Analysts,Tax Administrators, and individual state tax returnforms. Tax rates are as of January 1, 2014.HIGHEST MARGINAL CORPORATE INCOMETAX RATEThis variable includes local taxes, if any, and includesthe effect of federal deductibility, if allowed.A state’s largest city was used as a proxyfor local tax rates. In the case of gross receiptsor business franchise taxes, an effective tax ratewas approximated using NIPA profits, rental andproprietor’s income, and gross domestic productdata. The Texas Franchise tax is not a traditionalgross receipts tax, but is instead a “margin” taxwith more than one rate. A margin tax creates lessdistortion than does a gross receipts tax. Therefore,what we believe is the best measurementfor an effective corporate tax rate for Texas is toaverage the 4.3 percent measure we would use ifthe tax was a gross receipts tax and the 1 percenthighest rate on its margin tax, leading to our measureof 2.65 percent. Data were drawn from: TaxAnalysts, Tax Administrators, individual state taxreturn forms, and the Bureau of Economic Analysis.Tax rates are as of January 1, 2014.PERSONAL INCOME TAX PROGRESSIVITYThis variable was measured as the differencebetween the average tax liability per $1,000 atincomes of $50,000 and $150,000. The tax liabilitieswere measured using a combination ofeffective tax rates, exemptions, and deductions atboth state and federal levels, which are calculationsfrom Laffer Associates.PROPERTY TAX BURDENThis variable was calculated by taking tax revenuesfrom property taxes per $1,000 of personalincome. We have used U.S. Census Bureau data,for which the most recent year available is 2011.These data were released in July 2013.SALES TAX BURDENThis variable was calculated by taking tax revenuesfrom sales taxes per $1,000 of personal income.Sales taxes taken into consideration includethe general sales tax and specific sales taxes. Wehave used U.S. Census Bureau Data, for which themost recent year available is 2011. Where appropriate,gross receipts or business franchise taxes,counted as sales taxes in the Census data, weresubtracted from a state’s total sales taxes in orderto avoid double-counting tax burden in a state.These data were released in July 2013.REMAINING TAX BURDENThis variable was calculated by taking tax revenuesfrom all taxes—excluding personal income,corporate income (including corporate license),property, sales, and severance per $1,000 of personalincome. We used U.S. Census Bureau Data,for which the most recent year available is 2011.These data were released in July 2013.ESTATE OR INHERITANCE TAX (YES OR NO)This variable assesses if a state levies an estate orinheritance tax. We chose to score states basedon either a “yes” for the presence of a state-levelRich States, Poor States
estate or inheritance tax, or a “no” for the lackthereof. Data were drawn from: McGuire WoodsLLP, “State Death Tax Chart: Revised January 1,2014,” and indicate the presence of an estate orinheritance tax as of January 1, 2014.RECENTLY LEGISLATED TAX CHANGESThis variable calculates each state’s relativechange in tax burden over a two-year period (inthis case, the 2012 and 2013 legislative session)for the immediate next fiscal year, using revenueestimates of legislated tax changes per $1,000 ofpersonal income. This timeframe ensures that taxchanges will impact a state’s ranking immediatelyenough to overcome any lags in the tax revenuedata. Laffer Associates calculations used raw datafrom Tax Analysts, state legislative fiscal notes,state budget offices, state revenue offices, andother sources.DEBT SERVICE AS A SHARE OF TAX REVENUEInterest paid on debt as a percentage of total taxrevenue. This information comes from 2011 U.S.Census Bureau data. These data were released inJuly 2013.PUBLIC EMPLOYEES PER 10,000 RESIDENTSThis variable shows the full-time Equivalent PublicEmployees per 10,000 of Population. This informationcomes from 2012 U.S. Census Bureaudata.QUALITY OF STATE LEGAL SYSTEMThis variable ranks tort systems by state. Informationcomes from the 2012 U.S. Chamber of CommerceState Liability Systems Ranking.STATE MINIMUM WAGEMinimum wage enforced on a state-by-state basis.If a state does not have a minimum wage, weuse the federal minimum wage floor. This informationcomes from the U.S. Department of Labor,as of January 1, 2014.WORKERS’ COMPENSATION COSTSThis variable highlights the 2012 Workers’ CompensationIndex Rate (cost per $100 of payroll).This survey is conducted biennially by the OregonDepartment of Consumer & Business Services, InformationManagement Division.RIGHT-TO-WORK STATE (YES OR NO)This variable assesses whether or not a state requiresunion membership for its employees. Wehave 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 comesfrom the National Right to Work Legal Defenseand Education Foundation, Inc. Right-to-work statusis as of January 1, 2014.TAX OR EXPENDITURE LIMITStates were ranked only by the number of statetax or expenditure limits in place. We measurethis by i) a state expenditure limit, ii) mandatoryvoter approval of tax increases, and iii) a supermajorityrequirement for tax increases. Onepoint is awarded for each type of tax or expenditurelimitation a state has. All tax or expenditurelimitations measured apply directly to state government.This information comes from the CatoInstitute and other sources.www.alec.org
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