- Dale Brill
- economic investment rates
- Ernst & Young
- National Venture Capital Association
- New York
- North Carolina
- North Dakota
- south carolina
- State Business Tax Climate Index
- State Science and Technology Institute
- tax policy
- the Tax Foundation
- US Investment Monitor
“Keep it simple, stupid” (or KISS) is an adage that reminds us of the effectiveness of simplicity. From its origins in aeronautical engineering management, keeping it simple is usually good advice.
At risk of being the contrarian, my argument is that sometimes things can be made too simple, especially where politics and economics intersect.
To be sure, we make explaining how things work much easier by creating models. Models and theories reduce the complex to a simpler form. Yet in doing so, the full extent of the dynamic relationships between the elements involved are reduced or even ignored.
Think of water, for example. Its many forms include liquid, solid (ice), and vapor (steam). Its simplest form is H2O, reflecting the molecule created when two atoms of hydrogen bond to one atom of oxygen. But H2O tells us nothing of the density, viscosity, or molecular activity exhibited by the simplified articulation of water. As a result, it’s advisable to establish deeper understanding before agreeing to have H2O dumped on your head.
Keeping it simple can create problems. The magnitude of harm increases with (1) the degree of (over) simplification, (2) the consequences of being wrong, and (3) the degree to which the simplification is taken as fact –even truth. The use of KISS explanations in the integration of economics and public policy is particularly prone to wreak considerable damage.
We can mitigate the harm by evaluating catch phrases used in politics to simplify complex economic relationships by turning to historical data to give some sense of the statement’s validity.
One topic prone to oversimplification by politicians is the relationship between tax policy and economic investment rates. The KISS approach is evident in the mantra “Money flows to where it’s most welcome.”
When hearing this statement from policymakers, it’s tempting to conclude that states offering the least government drag on investment via taxes must be winning the competition for capital investments.
Therefore, a low-tax policy must be necessary, or at least very effective. Does this presumption hold up? Though not quite simple themselves, the measures necessary to evaluate this KISS hypothesis are certainly accessible. Let’s look at the states leading the pack in terms of business investment capital, venture capital and foreign direct investment (FDI).
The “US Investment Monitor,” produced by EY (formerly Ernst & Young), captured data from more than 5,000 business investments each year since 2005 and ranked the top 10 most successful in attracting business capital investment. States ranked in the top 10 for business capital investment between 2005 – 2012 include Texas, Louisiana, Pennsylvania, Ohio, Michigan, Illinois, New York, Indiana, North Carolina, and Iowa. Other states with recent appearances in the top 10 for 2013 and 2014 include Tennessee, Georgia, North Dakota, Montana, Nevada, South Carolina, Maryland, and North Dakota. Florida’s capital investment haul did not merit a mention in 10 years of ranking.
Of the states receiving the most investment capital, only Nevada is more tax friendly than Florida (#5 overall). The definition of tax friendly is taken from the Tax Foundation’s 2011 and 2012 State Business Tax Climate Index rankings. The index includes corporate, personal income, sales, unemployment, and property taxes.
In the most recently published 2016 index, Nevada fell to #5 and Florida improved to #4. The point is that only one of the states listed as gleaning the most capital investment was arguably more tax — or capital — friendly than Florida.
Venture capital data prepared by the State Science and Technology Institute (SSTI) and collected by the National Venture Capital Association (NVCA) and PricewaterhouseCoopers (PwC) painted a similar picture.
Using the volume of investments during the period 2009 to 2014, the states enjoying the top 10 positions include California, Massachusetts, New York, Texas, Washington, Illinois, Colorado, Pennsylvania, New Jersey, and Virginia.
Florida took the #12 position behind Maryland. To give some sense of magnitude, California attracted nearly 39 times the amount of venture capital and “Tax-achusetts” nearly eight times more than Florida’s $2.4 billion over the most recent five years reported.
Finally, analysis of foreign direct investment data echoes the results above. The top 10 include the usual suspects and a few new faces: Louisiana, Texas, Georgia, Alabama, Nevada, California, New Jersey, New York, Pennsylvania, and Tennessee. Florida again takes the #12 position, this time trailing North Carolina.
The evidence suggests that a welcoming environment created by a low tax structure is not necessary to compete for mobile capital. Clearly, there are other factors at play, such as talent supply, infrastructure, and quality of life.
The bad news is that the KISS approach to economic development policy certainly oversimplifies what’s really going on.
Policy is always complicated. The good news? Data and analysis far more insightful than what can be located using Google for a few hours are available for policymakers. We can only hope the Legislature’s analysis follows Albert Einstein’s advice: Make everything as simple as possible but not simpler.
Dale Brill, Ph.D., is founder and obsessive thinker for Thinkspot Inc., a Florida-based consulting firm. He has previously served as chief marketing officer for VISIT FLORIDA under Gov. Jeb Bush; director of the Office of Tourism, Trade & Economic Development within the Gov. Charlie Crist administration; and president of the Florida Chamber Foundation. You can reach Dale by e-mail at [email protected]. Column courtesy of Context Florida.