This July, after much wrangling with and within the state legislature, Michigan governor Jennifer Granholm signed into law the new Michigan Business Tax to replace the Single Business Tax (SBT), which has long been regarded as an albatross to the business community. By January 2008, the SBT will be history, substituted by what advocates describe as a simple, fair, competitive tax structure that will bring jobs – ie, direct investment – to the state.
Not that the bill’s passing has quietened passions on either side of the aisle. A day after Ms Granholm signed the new tax into law, Republican state representative Fulton Sheen spoke out against it.
“We have simply repainted the room, rearranged the furniture and called it tax reform,” Mr Sheen said in a statement. “Businesses and job providers deserve a fair chance to push Michigan forward toward economic prosperity.”
The fact that Ms Granholm is a Democrat and Mr Sheen is a Republican would ordinarily matter only to partisans who are interested in scoring yet another notch for their party. The office holders’ political roots take on a whole different context, though, when considering one of the bigger concerns that companies had last November when Americans went to the polls: that a changeover to Democratic leadership would hurt business interests.
The main concern lies with what Congress, which is now under Democratic control, might do, especially regarding regulatory oversight. For companies that are interested in investing directly in the US, the governors’ races were a secondary concern. A shift from Republic to Democratic leadership, so the stereotype goes, would quickly render the state hostile to business, at least in the form of higher taxes and greater local regulatory burden.
Six states made such a shift last November: Arkansas, Colorado, Maryland, Massachusetts, New York and Ohio. Michigan, it could be said, provides an excellent preview of what might happen in these states. Ms Granholm replaced a Republican in an earlier election. Her predecessor “scaled back the tax burden”, according to Caroline Sallee, senior analyst at Anderson Economic Group.
“While Ms Granholm didn’t reverse a lot of the tax cuts, there is not the same push to cut revenue or reduce the size of government,” Ms Sallee says. Ultimately, she says, “when you have a switch in governorship, there is a difference in how the state will approach tax policy”.
Democrats raise taxes. Republicans lower them. Ergo, invest in a Republican state. This theory only addresses part of what attracts investment to a state, however. Taking the stereotype of political differences, it could be said that Democratic politicians have a distinct advantage in other areas important to foreign investors: the state’s infrastructure, education and other social issues.
“These issues count among investors, too,” says Ronald R Pollina, president and real estate economist at Pollina Corporate Real Estate, and publisher of the popular Top 10 Pro-Business States annual report.
Given the harsh realities of global business, a deficit in any category can be detrimental to a locale. “There is an increasing movement of business offshore from the US,” Mr Pollina says, even if they do not particularly want to move. “Companies are saying to us that if they are to stay in the US, they have to be in the most pro-business place possible or they will not be able to compete globally.”
When evaluating a particular potential site for a client, Mr Pollina breaks the analysis into two phases. The first includes two factors that are weighted much heavier than any other criteria: taxes, including incentives to locate in the state; and the right to work or the presence of unions. The second phase looks at such factors as quality of life, education and teen pregnancy.
“Tax incentives are becoming more and more important to companies,” says Mr Pollina. “The international competition is such that often these incentives make the difference to whether a company will grow and expand locally or move offshore.”
Mr Pollina’s comments should not lead to him being labelled as an automatic fan of Republican administrations, however. “There is no statistically significant difference between a state’s performance and whether it is run by a Democratic or Republican administration,” he says.
“I have seen good Republican state administrations and good Democratic ones, and bad Republican and bad Democratic ones.”
There are a number of reasons why that is so, he says. Some states, such as Virginia, limit a governor’s term to one six-year tenure. Virginia’s governorship has changed hands between the Democrats and Republicans in recent years, and the state was ranked the number one state in which to do business in 2007, according to Mr Pollina’s survey.
Also, the state legislature plays a role in navigating change, he says. If the governor and the legislature are divided politically, a stalemate or, worse, half-baked policy can result. That was the situation in Maryland, when it was under Republican control from 2002 to 2006, with the legislature and governor often at odds.
However, the biggest factor behind the party-agnostic stance that Mr Pollina takes is the fact that the decisions an administration makes during its ramp-up period, its most vulnerable and politically and economically naïve time, are most crucial and often based on unrelated considerations.
“Some new administrations will come in and destroy strong programmes and state economic development organisations,” Mr Pollina wrote in his report. “We have seen new governors come into office and, within a few months, decimate excellent state economic development staffs.” (See below).
Judgements of what is good leadership for a state can often be difficult to call. The Michigan business community was torn over the tax debate, especially as several bills were floated before the final one was voted on, says Ms Sallee. Although Ms Granholm may be perceived to be less interested in cutting taxes, there is little dispute that the former tax programme was in need of an overhaul. The single business tax had few supporters. The only question was how to replace it.
Especially at the state level, the definition of what is a Republican and what is a Democrat has changed a great deal in the past 30 years, says Paul Marttila, a partner at BDO Seidman, who also leads the firm’s tax services, business location incentives and site selection practice. “Politicians at state and local levels are far more pragmatic about their political philosophies,” he says. “I have never heard a company say it is more advantageous to be in a Republican or Democratic state.”
State governor decimates development staff
Ronald R Pollina, president and real estate economist at Pollina Corporate Real Estate, reported on a mid-western state after the 2004 election that had on board an excellent economic development professional.
“She was highly experienced, exceptionally professional, responsive and, most important, our clients felt the same about her. This was a state economic development person who made deals happen. When we had a company considering her state, we refused to work with anyone else in the state, despite state policy,” he wrote.
The new governor decided to replace her and several other staff members. “The replacements, as is often the case, were not experienced economic development professionals. Even if they proved to be excellent at their jobs, it would take at least 18 months before they understood what they needed to do to be successful. This assumes that they have the ability and the interest, which unfortunately is not always the case.”