These days talk about taxes of any kind, unless cuts are being proposed, is the third rail of American politics.  Many business people and of course doctrinaire conservatives insist that lower tax rates create more incentives for investment, business formation and economic growth. Tax cuts, they continue, are thus a key mechanism for spurring economic growth. Though we haven’t seen much of the Laffer Curve since the heyday of Reaganism, a new generation of supply-siders is arguing for more tax cuts despite our already-staggering deficits.

A new study gives us a new tool with which to measure the effects of state taxes on economic development. “Competitiveness of State and Local Business Taxes on New Investment: Ranking States by Tax Burden on New Investment”, a collaboration between the Council on State Taxation (COST) and  Ernst & Young, ranks the 50 states according to a business tax competitiveness index. “The index includes all major state and local business taxes associated with new capital investments including corporate income and franchise taxes, real and personal property taxes and sales taxes on business input purchases,” notes the Executive Summary for the study. “It focuses on five types of mobile capital investments that states compete to attract: headquarters facilities; research & development facilities; office and call center facilities; durable and nondurable manufacturing facilities.”

The map above by Zara Matheson of the Martin Prosperity Institute maps the index across the 50 states. The average tax on new investments is 7.9 percent; obviously, there is tremendous variation from state to state. Maine imposes the smallest tax burden (just three percent) on new investment, followed by Oregon, Ohio, Wisconsin and Illinois, all with effective tax rates on new investment of five percent or less.  On the other side of the ledger, New Mexico’s state and local tax system imposes the highest tax burden, followed by the District of Columbia, Rhode Island, Kansas, and Louisiana, all of which have effective tax rates on new investments in excess of 10 percent.

But to what extent are the tax burdens that states impose on new investment associated with the differences in their economic performances? Do states with higher investment tax burdens show lower rates of innovation, economic output, and innovation compared to those with lower tax burdens? With the help of my colleague Charlotta Mellander, I took a quick look at the associations between state investment tax burdens and key measures of state economic performance.

The overwhelming result was that we could find no connection at all between a state’s investment tax burdens and a state’s economic performance. There was no statistical association between state investment tax rates and such key indicators of economic performance as economic output (gross state product) per capita, state income, or wages. Similarly, we found no association between state investment tax burdens and unemployment rates. Likewise, we discerned no association between a state’s investment tax burdens and its levels of human capital or knowledge based and creative class jobs. Nor was there any association between states’ investment tax burdens and the well-being and happiness levels of their citizens. Interestingly enough, there was no association between a state’s political complexion (whether it voted for McCain or Obama in 2008) and its investment tax burdens—in other words, conservative states did not have lower tax rates.

The scatter graph above, which shows the missing association between state investment tax rates and income, makes this plain. Look at states near the bottom of the graph, below the line for average income. In the right hand quadrant are states where low incomes match up with high investment tax burdens. New Mexico is the extreme outlier here, but Sunbelt states like Mississippi, South Carolina, Tennessee and Louisiana also fit this bill.  In the bottom left hand quadrant are states like Maine, Ohio, Oregon and Wisconsin, where incomes and tax burdens are both low. Now let’s look above the line, at high income states – a similar pattern is evident.  There are states like Delaware, New Hampshire and Illinois, where higher incomes match up to lower investment tax burdens. But there are also those, like Connecticut and Massachusetts where high incomes and high investment tax burdens go together. We ran many more of these, which all provide the same general picture, for example the scatter-graph for total factor productivity below.

Some might say those are broad economic indicators, and tax rates are designed to work in a more targeted way on business decision-making, encouraging more investment in plant and equipment for R&D, for example.  The COST/ Ernest & Young report makes this point as well, noting the two-stage nature of business location and investment decisions. In the first phase, companies orient their location decisions on key factors, such as the availability of talent and transportation costs, but then at the second stage, once the list is narrowed down, tax rates come more into play. As the study notes, “tax factors can be a determining factor between states with otherwise similar non-tax costs.”

If low tax burdens encourage more R&D investment and act to incentivize innovation, you’d expect to see more patents coming from the states with the lowest rates. But as the above scatter illustrates, the correlation between the Business Tax Competitiveness Index and patents per capita is actually negative (-.3, significant at the 5 percent level).

If lower investment tax rates encourage new business investment, at the very least you’d expect to see more new firms in states with low investment tax rates.  Here again there is no relationship at all (see the scatter-graph above).

The bottom line is this: lower state investment tax burdens aren’t associated with stronger state economies, and higher investment tax burdens aren’t associated with worse ones.  Tax cuts may be an effective political strategy and lowering business and investment taxes may appeal to corporate interests and attract campaign contributions, but they have little relation to state economies. (A recent study I profiled here covers some five decades of data; it concluded that the impact of state taxes on economic growth is “quite variable” and “not always in the expected direction,” while  “expenditure impacts are more consistent.”)  When it comes to building robust, resilient and prosperous economies, more fundamental factors than taxes—like human capital, entrepreneurship, and innovation—come into play.

The conventional wisdom presumes that growing populations bring economic growth. But what drives wealth isn’t how many people a place is adding, but how much more productive its workers are becoming.  Yesterday, I showed that population growth and productivity growth are unrelated on the level of states. Today, drawing on my ongoing research with Kevin Stolarick of the Martin Prosperity Institute and Jose Lobo of Arizona State University, I’ll take a look at the pattern for 350 plus U.S. metro areas. The disconnect is even more pronounced.

The map above charts population growth across metros. Sunbelt metros (from dark to lighter blue on the map) grew at the fastest clip. East and West Coast metros (shaded green) grew at a considerably slower pace. The slowest-growing metros (beige) are concentrated in the Midwest.

The second map charts the change in productivity – measured as gross metropolitan product per capita. This map looks completely different than the first one.  The top productivity gainers (highlighted in blue) are spread throughout the country. They include metros like Pascagoula, Mississippi; Corvallis, Oregon; Casper and Cheyenne, Wyoming, and Vallejo, California.  College towns like Manhattan, Kansas; Durham-Chapel Hill, North Carolina and Binghamton, New York also register impressive gains. Among large metros (those with over one million people), San Jose, California, Portland, Oregon and Oklahoma City, Oklahoma saw the largest productivity increases.  But the productivity laggards are concentrated in two areas: the Sunbelt and the Midwest.

The third map also charts the change in productivity, this time measured as gross metropolitan product per worker. This map is even more telling.

The same large metros and the same college towns as on the last map are well-represented, as are heartland metros like Casper, Wyoming; Sioux Falls, South Dakota, and De Moines, Iowa, which saw impressive gains of 15 percent better. Even Frostbelt metros like Buffalo, Baltimore, Philadelphia and Pittsburgh, whose very names have become bywords for decline, registered productivity gains of between 7 and 10 percent. But the five metros with the fastest population growth all saw their productivity decline. Palm Coast, Florida’s dropped a whopping 18 percent, the fourth worst figure in the nation. Cape Coral, Florida’s fell by 13 plus percent, Raleigh, North Carolina’s by 9 percent (more than Frostbelt metros like Dayton or Toledo, Ohio), St. George, Utah’s by more than 5 percent, and Las Vegas, Nevada by 1 percent. Atlanta’s productivity fell by more than 12 percent, which puts it in the same league with Detroit.

A decade ago, urban economist Paul Gottlieb coined a term for this disconnect between population and economic growth. He called it “growth without growth,” a construct former Ventura Mayor Bill Fulton has picked up on in recent writings.  When Gottlieb compared population growth to growth in real per-capita income in the 100 largest U.S. metropolitan areas, he found a pattern similar to what we discovered for states. Like states, U.S. metros divided into four categories.  Some – like Atlanta, Austin, and Dallas — were above the national average in both categories. Others, including many older Rustbelt metros, were below average in both. But it’s the last two categories that were more interesting.  Much as we found with states, half of the 100 largest metros divided into “population magnets” — places where population grew but not income, and “wealth builders,” where incomes rose much faster than population.

When Stolarick, Lobo and I looked at the connection between population growth and productivity across America’s 350 metro regions over the past decade, we found that, if anything, the disconnect has become even more pronounced. Just one in three metro areas experienced gains in both productivity and population that exceeded the national average—and we found no statistical association whatsoever between population growth and productivity growth, either for metros or states. This not only challenges the notion that population growth is a proxy for economic growth, it puts the lie to economic development strategies that encourage population growth as an end in itself. A rising population can create a false illusion of prosperity, as it did in so many Sunbelt metros, which built their house-of-cards economies around housing construction and real estate development, leaving ghost towns, mass unemployment, and empty public coffers in their wake when the bubble inevitably burst.

The south and the west may be winning the demographic race, but America’s economic winners are the places that have improved their productivity—something which doesn’t turn on the sheer numbers of workers they have on tap, but rather on how skilled and innovative they are.

This past weekend, I had an oped in the New York Daily News about the widespread fallacy that population growth and prosperity go hand in hand.

Yes, the Sunbelt is growing and the Frostbelt declining.  That decades old meme was confirmed by the earliest releases of the new 2010 Census. “The quest for mild winters remains the great constant of American demographics,” wrote Walter Shapiro in a piece headlined “The Census Ratifies the Sunbelt’s Supremacy and Buoys the GOP.  “For the first time in history, more than half of the nation’s population (308,745,538) resides either in the South or in the warm-weather states of California, Arizona and New Mexico.”

But are those states that are adding people also growing economically?   Not so much, actually.

State population growth does not necessarily translate into higher incomes, notes Harvard economist Edward Glaeser, who points out that median family incomes were $56,200, $60,800 and $56,600 in fast growing Georgia, Nevada and Texas, significantly lower than the $83,000, $81,000 and $66,900 found in slow-growing Connecticut, Massachusetts and New York.

If there is one thing that economists of all persuasions agree on is that it is productivity growth – fuelled by invention and innovation, increased skills and human capital – that is the main driver of economic growth and greater prosperity.  Higher productivity translates into higher wages and income and improved living standards.

So with the help of my colleagues Kevin Stolarick of the Martin Prosperity Institute and Jose Lobo of Arizona State University,  I decided to take a more systematic look at the connection between population growth and productivity growth  across the 50 states.  We found little connection between the two.

The map above shows state population growth based on the new 2010 U.S. Census. The Sunbelt states (darker orange and red) – Nevada, Texas, Arizona,  Florida, Georgia, North and South Carolina, as well as Colorado, Idaho and Utah in the Rocky Mountain West – grew their populations at the fastest clip over the past decade.

The second map charts the change in productivity – measured as gross state product per capita. Now heartland states like North and South Dakota, Wyoming, Nebraska, Iowa, Montana and Oklahoma as well as Oregon in the northwest and Maryland and DC in the east are the top performers, with Sunbelt states lagging.  Once-booming Florida is seeing more people move out than move in for the first time.

The scatter-graph below puts the picture in sharp relief. Some states that have attracted lots of people have registered meager productivity growth. This is especially true of the booming Sunbelt states that show up in the lower right-hand quadrant of the graph. Nevada, which posted the fastest rate of population growth, posted negative productivity figures. Productivity growth was also negative in the fast-expanding Sunbelt states of Georgia and North and South Carolina. And economic conditions in many of these states have likely worsened as the housing crisis has deepened.

Conversely, other states where population growth has been slow have seen much higher productivity growth. This group, clustered in the upper left-hand quadrant, includes Rhode Island, New York, Oklahoma, Iowa, North Dakota, South Dakota, Nebraska, and Kansas, all of which posted above-average productivity growth alongside below-average population growth.

Sadly, there are quite a few states (lower left-hand quadrant) that posted both below average population growth and below average productivity growth.  Many of these – Michigan, West Virginia, Ohio, Illinois, Indiana, Wisconsin and Minnesota – are in the Rustbelt. But this group also includes several states in New England and the Northeast – Massachusetts, Maine, New Hampshire and Connecticut and New Jersey, as well as Missouri and Kentucky in the south.  These states have been locked in a downward economic cycle.

There are just a handful of states (upper right-hand quadrant) – among them California, New Mexico, Oregon, Washington, and Virginia – that posted rates of productivity growth and population growth that were both above the national average.

A booming population might be a sign that people want to live in a place—because of a pleasant climate, a lower cost of living, or the illusion of prosperity caused by a housing boom. But population growth alone does not suffice to make a state an economic “winner.”

Later this week,  I’ll take a close look at population growth and productivity growth in America’s metropolitan areas, to see if the pattern holds.

Here’s the abstract from a new paper by Ed Glaeser and Matthew G. Resseger (thanks to David Ptak for the pointer).

There is a strong connection between per worker productivity and metropolitan area population, which is commonly interpreted as evidence for the existence of agglomeration economies. This correlation is particularly strong in cities with higher levels of skill and virtually non-existent in less skilled metropolitan areas. This fact is particularly compatible with the view that urban density is important because proximity spreads knowledge, which either makes workers more skilled or entrepreneurs more productive. Bigger cities certainly attract more skilled workers, and there is some evidence suggesting that human capital accumulates more quickly in urban areas.

Full text is here.

The workplace design firm Gensler not only works with companies to create more efficient workspaces, they also have been working on methodologies for measuring their impacts on corporate needs.

Back in March 2006, with the help of professional survey firm D/R Added Value, they polled over 2,000 office workers (selected from a pool of over 8,000 to achieve a representative sample) about their workplaces. Here are some results:

Workplace and empowering creativity:

• 90% of American workers believe that workplace design affects their productivity
• 50% of workers say their current office environment empowers them to innovate
• 49% of workers said that they would work an extra hour per day if they had a better work environment
• 33% say workplace improvements are a priority at their company
• The average office worker feels he or she has less time to think than they did five years ago

Where and how people work effectively:

• 84% of employees say they accomplish their best work at the office
• 12% of workers say they do their best work at home
• 67% said they were more efficient at developing ideas when collaborating closely with co-workers
• 80% of workers feel technology has enhanced their workplace environment (including desktop computers, mobile phones, video conferencing, wireless access, and mobile e-mail devices)

Who works in offices and what do they do all day (in this survey):

• 42 years old is the average age of an office worker
• 6.3 years is the average time they have been at their job
• 210 is the average number of employees a person works with in the same office
• 13% was the average amount of work time spent answering e-mail
• 14% was the average amount of time spent on the phone
• 20% was the time spent in meetings

While this survey was likely biased toward larger companies, the results offer useful insight into workplaces generally, but especially for the larger companies.

The data that I found most provocative was that while 90% of people feel their workplace is important to their productivity, only 33% see this as a priority at their company.

Could there be a lot of lost productivity from poor or anachronistic office design?

Does your workplace enhance or hamper your productivity?