This blog printed on 100% recycled electrons.
First, a personal note: My second laptop was a Gateway Solo 2100, purchased for a cool $2800. It replaced a laptop whose brand I can't even remember but which ran Windows 3.1 on a black-and-white screen. In my first year of using the Gateway, it suffered irrecoverable crashes and required factory replacement three times. The third time I was in Russia and spent two months communicating with Gateway via e-mail trying to arrange service. I managed to get it shipped to Gateway from Moscow. The Gateway people then tried to ship the computer back to my old address in Edmonton, Alberta. Then the computer service rep told me not to worry, they had caught the error and shipped the machine to Connecticut. Alas, the only connection I have ever had with Connecticut was a twenty-minute incursion on a bicycle from a friend's house in New York. When Gateway finally retrieved the computer and sent it to my Moscow address, they declared it to be brand new and entered the full value of a new computer on the custom's information. Russian customs thus demanded that I pay the standard 50% import tariff to get my computer, in this case, $1400. I had the computer returned to sender, told Gateway to send it to my home address, and flew home for $800 to pick up the computer myself, only to discover that all data on my hard drive had been wiped (I know, my fault for not making more back-ups).
I did get another year and a half of use out of the Solo, after which I replaced it with a smaller, faster NEC Ready 120LT, the loudest but toughest little computer I've ever owned. It cost $800. It still runs. It has never required a trip to the factory. It has never lost data. The Solo now sits under the couch, where Madville Times Jr. can pull it out and play with it. She like to stand on the keyboard.
Given a history of interaction with Gateway revolving around shoddy workmanship and service, I thus have few good things to say about Gateway. But enough about me!
Ted Waitt started Gateway in Sioux City, Iowa in 1985. Waitt hopped the border to South Dakota in 1990, promising lots of jobs. Indeed, facilities in North Sioux City and Sioux Falls employed 6000 and 1800 people, respectively. In return, the state bought all sorts of computers from Gateway, loading up state offices and schools with Holstein-decorated boxes and mousepads. DSU still locks students into leasing Gateway Tablet PCs, and the state pushes those same computers in the Classroom Connections program for high schools.
But in 1998, Waitt moved company headquarters to San Diego, taking all of the high-paying executive and engineering jobs with him. Gateway shut down its Sioux Falls facility. As of May 2006, according to KELO, "Gateway employed a total of about 1,800 people in South Dakota and at its headquarters in California, with about 850 of those positions based in North Sioux City" [AP report, "Acer Plans to Acquire Gateway for $710 Million," KELOLand.com, 2007.08.27].
So let's recap: South Dakota offers a low-tax environment (no corporate or personal income tax), buys thousands of computers, and even finances a loan to the company for 3% [Charles Platt, "Beats Skinning Hogs," Wired News, Issue 3.05, May 1995], a rate Gateway was unlikely to get at any bank. In return, Waitt takes his company and several thousand jobs to California. What gives?
The fact is that a low-tax/no-tax environment does not guarantee economic prosperity for the state, let alone loyalty from corporate citizens. Michael P. Ettlinger of the Institute on Taxation and Economic Policy cites Gateway's abandonment of South Dakota as an prime example of this economic truth:
An honest assessment of the data over long periods of time leads to the conclusion that personal income taxes do not adversely impact on states' economies in any significant way. This really shouldn't be surprising. After all, there are other things that are far more likely to have an impact. Compared to other costs of doing business--labor costs, proximity to markets, quality of work force and a variety of other factors--the burden of the personal income tax is quite a small factor.
The argument is sometimes made that state personal income taxes influence the locational preferences of entrepreneurs and CEOs. The suggestion is that these individuals, who have a disproportionate impact on a state's economy are far more likely to locate in a state where they will pay less tax. There are, however, a number of flaws in this argument.
First, as mentioned above, there are other factors which are far more likely to affect the success or failure of a business venture than personal income tax liability.
Second, presumably we are talking about wealthy businesspeople, since middle- and low-income businesspeople are actually better off in a state that relies more heavily on progressive income taxes than regressive taxes. One of the primary benefits of being wealthy is the opportunity to live where one wants to. A few percentage points of personal income tax is unlikely to have a major impact on the decision of where to enjoy one's prosperity. An example of this that has recently been in the press is the founder and President of Gateway computers. He recently moved himself, most of the company's executives and engineers from South Dakota, where there is no personal income tax, to California which has a one of the highest top personal income tax rates. He decided he wanted to live in Southern California, he was having trouble attracting other talented individuals to South Dakota and he was in a position to do what he wanted--so he did.
Third, the differences between states in the personal income tax liability for a wealthy person is typically quite small. This is, in part, because of the impact of the deduction on the federal tax return for state taxes. A wealthy person in a state with a tax rate of 6 percent pays that percent of his or her taxable income to the state. But if they are in the top federal tax rate bracket (approximately 40%), their federal personal income tax is reduced by an amount equal to 2.4 percent of their taxable income. Thus the net cost of the state income tax is only 3.6 percent.
[Michael P. Ettlinger, tax policy director, ITEP, testimony regarding House Bill 109, New Hampshire Legislature, 1999.01.19]
As Ettlinger shows us, South Dakota's no-income-tax stance doesn't matter to wealthy businesspeople. It penalizes lower- and middle-income workers and businesspeople with a regressive tax system. And as the Gateway experience shows, it doesn't guarantee that the corporations we might lure to the state will stay and be loyal corporate citizens. Even if a no-income-tax policy is the marginal factor that induces a handful of companies to move here, those companies demonstrate by their moving here for such meager increases in profits that they will pull up stakes and leave buildings empty and South Dakotans jobless the moment some other state (or country) offers them a tax break or other incentive package that will shave another 0.1% off their operating expenses.
In his 1999 testimony, Ettlinger, also pointed out that Minnesota, with the highest income tax rates in our region, also had the best economic performance in the region. South Dakota, said Ettlinger, lagged behind Minnesota and other income-tax states on several economic measures.
An income tax doesn't guarantee economic success, but it doesn't kill it, either. Gateway left our supposedly business-friendly environment for big-government, big-tax California, and took several thousand jobs with it. South Dakota should focus less on low taxes and incentives for itinerant corporations who may not stay long, if they come here at all. Instead, we should direct our attention to creating a less regressive (less sales tax and gambling), less arbitrary (less property tax based on guesswork assessments and speculation), more equitable tax system. We can then use those revenues to make more investment in the foundation of all economic development, education. We also need to concentrate on developing our own homegrown entrepreneurs, citizens who already have some loyalty to South Dakota and will live and work here not just for profit, but because they feel a genuine connection and obligation to our statewide community.
Big deal gateway left. One thing we have learned in this country is that our economy is fast paced and ever changing. Gateway came around when the idea of personal computers was a brand new concept. 20 years later, everyone has at least one in there home and every business has them. If taxes have very little impact, let's get rid of them altogether!! We invest 52% of all state revenue into the education system, so you can't tell me that we don't fund education!! We devote a higher percentage then almost every state in the country! The problem is that a lot of the money goes into the bureaucracy you liberals love so much and not directly into the classroom (including teacher salary you're always complaining about)! We don't need a state income tax dummy, we need to cut out the red tape in the education system and funnel it directly to the classroom and ACTUALLY invest it, as you said, in our kids! The more control the parents/teachers/local communities have in education, the better it will be. We don't need all these administrative jobs, we need parents/teachers/local communities working together.
ReplyDeleteDude, I'm sticking with Dell!
ReplyDeleteOnce you have a fortune accumulated income tax is irrelevant. It is only critical when you are trying to create that wealth. However, that misses the point of the story. Gateway didn't leave for California's tax system. And I doubt any business goes to MN because of it's "progressive" taxes. As a recent college graduate, would I listen more closely to the recruiter who wants me to move to Sante Cruz or the one who is asking me to move to Sewer City? Are you really surprised that Gateway left when they discovered they were losing out in recruiting critical talent?! Taxes play a part in where to base operations, but its just one factor in a larger equation that SD loses out on. That's no reason to go in the opposite direction by making SD even LESS attractive by screwing up the tax system.
ReplyDeleteIf I hadn't been born there I don't think I'd ever have a reason to want to go back....but 10,000 lakes sounds nice.