To promote its right-wing policy goal, the American Legislative Exchange Council (ALEC) has been disseminating its Rich States, Poor States study. The paper has drawn criticism for using subpar research techniques and drawing false findings. To address the concerns made by previous investigations, such as Selling Snake Oil to the States by Good Jobs First and the Iowa Policy Project, ALEC published a paper titled Tax Myths Debunked, written by Eric Fruits and Randall Pozdena.
Selling Snake Oil’s examination of the variables influencing economic development and rising earnings among the states between 2007 and 2012 is criticized in Tax Myths Debunked. Selling Snake Oil suggested that state economic structure is likely to play a significant influence in deciding how the economy performs in the near run. ALEC misread this study, believing the model was forecasting changes in the percentage of employment by sector, which it was not.
Secondly, ALEC argues that there is a strong relationship between tax policy and economic health and cites two pieces of research in support. However, Selling Snake Oil presented a discussion of reviews of dozens of research articles over the past 30 years that have led to the conclusion that business taxes have, at best, a small effect on business location decisions. In contrast, ALEC found two pieces of research that supported their position and ignored the rest.
The final complaint focuses on a number of scatter plots and connected relationships that Selling Snake Oil presents. These graphs showed how states that ALEC had graded highly or poorly in its 2007 Rich States, Poor States publication had really fared since then. According to ALEC, the formula used to determine the correlation between two ranks is distinct from the formula used to determine the correlation between two continuous variables. Selling Snake Oil determined the Spearman coefficient after converting all performance factors to rankings as a rebuttal to this claim. Except for one instance when the impact was bigger and statistically significant, the results remained the same.
Last but not least, Tax Myths provides an alternative to the study in Selling Snake Oil by comparing the state EOR each year to the value of the “state coincident indices” for each state that are supplied monthly by the Federal Reserve Bank of Philadelphia. The four metrics that make up the coincident indices are non-farm employment, average manufacturing hours worked, unemployment rate, and pay and salary disbursements. The EOR of a state and the value of the coincident index were shown to be significantly correlated by ALEC.
However, ALEC’s criticisms appear to be based on a misunderstanding of Selling Snake Oil’s research methods and conclusions. Despite presenting alternative analyses, Tax Myths Debunked fails to address some of the key criticisms made by Selling Snake Oil. For example, Selling Snake Oil found that ALEC’s report Rich States, Poor States relies heavily on measures of economic competitiveness that are not associated with higher levels of economic growth, and that ALEC’s policy prescriptions have little empirical support.
Furthermore, while ALEC argues that there is a strong relationship between tax policy and economic health, Selling Snake Oil presented a discussion of reviews of dozens of research articles over the past 30 years that have led to the conclusion that business taxes have, at best, a small effect on business location decisions. In contrast, ALEC found two pieces of research that supported their position and ignored the rest.
In conclusion, while ALEC’s Tax Myths Debunked aims to defend its Rich States, Poor States report and refute criticisms made by Selling Snake Oil to the States, it appears that some of ALEC’s criticisms are based on a misunderstanding of Selling Snake Oil’s research methods and conclusions. Despite presenting alternative analyses, Tax Myths Debunked fails to address some of the key criticisms made.
