The head of a statewide business organization claims that the state’s “bureaucratic, arbitrary, time-consuming and expensive regulatory system” weakens the state’s “business climate.”

A small businessman argues that the high cost of workers compensation makes for a poor business climate.

Citing the ratings of business magazines, a legislative candidate laments the state’s standing “as one of the worst states in the nation for job growth and business climate.”

A pro-business think tank reports that the state has “one of the most difficult business climates in the nation,” and a pro-business journal notes that the state has “a well-documented bad business climate.”

No surprise, right? Vermont’s “poor business climate” has become a statewide mantra, and is already a factor in this year’s governor’s race.

Except that the above examples are from, in order: New Jersey, California, Wisconsin, Washington (State, not D.C.), and Maryland.

No doubt all these states have their economic problems, as do the other 45. It may be significant, though, that they are among the more prosperous states. Maryland and New Jersey have the highest median household incomes in the county. California isn’t far behind. Before the start of the Great Recession, Washington had the tenth highest per capita income in the country. Wisconsin had the 20^th largest economy, just about what it ought to have considering its population.

So why all the complaints about the “poor business climate”?

Because in almost every state, some (though not all) business leaders and their supporters in politics and academia complain abut the “business climate.”

They’d be fools not to. It’s a good argument for getting what business leaders often want: less regulation and lower taxes. Most business leaders are more wealthy than not, meaning that in state’s with (relatively) progressive income taxes their tax bills are (relatively) high (though, in Vermont at least, lower than they were a decade or two ago).

As to regulations, many of them are at least a big pain in the neck (forms to fill out and all that) and often a profit-reducing cost.

Furthermore, many businessmen think that they do not need most of the services financed by their and everyone else’s taxes. As it happens, they are at least partly wrong here. This year the Legislature approved more transportation spending than ever, according to House Speaker Shap Smith. Business interests did not complain. Roads are, among other things, a subsidy to businesses; the taxes they pay are a lot less than it would cost to build and maintain their own highway systems.

Schools are a subsidy to business, too. Vermont schools may be expensive, but firms would spend a lot more if they had to teach all their workers how to read, write, and do arithmetic.

Just because complaints about “business climate” are heard in almost every state does not make them totally invalid. In most states, a few costs could probably be cut and a few regulations eased to lubricate economic activity without harming workers, consumers, the needy, or the environment.

But not much. Otherwise, those costs would have been cut, those regulations eased. Almost all of them exist because they provide goods, services, and protection that people want.

What the near-universality of the “poor business climate” slogan does mean is that the phrase is meaningless. It is self-interested bumper-sticker drivel that does not deserve to be taken seriously.

Neither do the “studies” by some pro-business “think tanks” or business magazines that purport to rank states according to their “business climate.” These rankings are based on extraordinarily selective criteria, as if the studies were designed to promote a policy agenda rather than to examine the subject honestly. They were.

The studies do take into account a state’s spending, taxes, regulations, and labor union strength. They tend to ignore the state’s health care, education system, recreation and cultural amenities, and other factors which attract the educated, higher-income people who have money to spend, and are therefore good for business.

Among academic economists, who acknowledge that, as one of them put it, “exactly what constitutes a good business climate is not entirely clear,” there is no agreement on whether state taxes, regulations, and labor union power (weak in Vermont) have any discernible impact on economic activity at all.

“Considerable empirical evidence suggests that state and local taxes do not significantly impact the geographic distribution of economic activity,” noted economists Bruce L. Benson of Florida State University and Ronald N. Johnson of Montana State at the outset of an article in the journal Economic Inquiry hIn general, the consensus among economists who have carefully studied the data is that if these factors do affect a state’s economic performance, they do so minimally, and are therefore easily offset by the positive outcomes (good schools, parks, health care, etc.) taxes and regulations provide.

In Vermont, for instance, where the term is bandied about almost daily, the “poor business climate” argument faces an obvious challenge. If the business climate is so poor, how come the economy is relatively so good?

The “relatively” is emphasized because right now Vermont’s economy is not good at all. But that’s only because the national (and in fact the global) economy is not good at all. But compared to most other states – and especially most other states in its region – Vermont’s economy is somewhat better.

Its unemployment rate, though higher than it was a couple of years ago, is lower than the national or regional average. So is its poverty rate and its home foreclosure rate. Vermont seems to be coming out of the recession somewhat faster than most other states, based on the unemployment and job creation numbers.

That doesn’t mean that, from the perspective of some businesspeople, state laws and taxes are not a serious problem. But it obviously isn’t a big problem for all of them, or they wouldn’t be hiring more workers and planning new facilities, as many of them are.

Vermont’s regulations probably have their greatest impact on builders and developers. All states have environmental restrictions, but Vermont’s are among the most stringent. That helps explain why builders, developers, and realtors are among the most vocal critics of the state’s business climate.

But those regulations help other businesses, such as the software developers discussed in Friday’s post.   The regulations help attract affluent, educated, newcomers to the state, and John Canning of the Vermont Software Developers Alliance said that’s good for the software business.

The bottom line, to put it in business terms, is that objective examination of the “poor business climate” claim can not even define the term, much less find persuasive evidence of its existence in any state. Vermont, like the rest of America, is pro-business, and would be foolish to be otherwise. Everybody benefits from a strong economy, which in turn depends on the healthy profitability of businesses.

The “poor business climate” moan is just the whine-of-choice of some segments of the business community and the politicians pandering to them. In fairness to that community, they are hardly the only whiners these days. But as members of the wealthiest and most powerful faction in the land, they have less excuse.

In 2002, Vermont was losing jobs. When the year ended, .09 percent fewer Vermonters would be employed than when the year began.

To reverse the decline, Gov. Howard Dean and the Legislature passed a capital gains tax exclusion. On the first 40 percent of a capital gain – from selling stocks or a business – a taxpayer would pay no state tax. The hope was that this tax break would encourage investment, therefore the creation of new businesses (or the expansion of old ones), therefore more jobs.

In 2003, the year the exclusion went into effect, the state still lost jobs, if by one tenth of a percentage point less. But one year is not a fair test. Better to check the five years before and after the tax change.

From 2003 through 2007, the number of employed Vermonters rose from 298,600 to 307,800 a 3.1 percent increase. From 1998 through 2002, before the capital gains exclusion took effect, employment rose from 282,000 of 300,900, an increase of more than 6.5 percent,

Does this prove that cutting capital gains taxes depresses job growth?

No. It doesn’t conclusively prove anything. Despite the mini-recession of 2001-2002, employment in the rest of the country grew faster between 1998 and 2002, also. No state is an economic island, entire in itself, and no state’s tax change can save that state from the effects of a nationwide recession, or, for that matter, prevent it from enjoying the fruits of nationwide prosperity.

But along with several other examples, the relationship – or lack thereof – between Vermont’s capital gains exclusion and its job growth does come close to proving that cutting the capital gains tax does not necessarily create more jobs.

In fact, capital gains tax preferences, such as the one the Legislature and Jim Douglas just adopted, (bringing back part, though not all, of the 2002 exclusion) have only two certain outcomes:

(1)  People who pay capital gains taxes, mostly the very wealthy, will pay less in taxes.

(2)  The state government will have less money to spend on highways, schools, law enforcement, health care, protecting the environment, and the like.

This Fiscal Year (FY 2011, starting July 1), Vermont will have only $3 million less because of the capital gains cut, and state officials and lawmakers agree that they can save that much without actually cutting state programs or services. For FY 2012, though, the revenue loss will be closer to $11 million. Cuts will be required.

It is reasonable to assume that those who benefit from the lower rates will not be discomfited by the spending cuts.

It isn’t that there is no case to be made for a positive association between lower capital gains taxes and more employment. Most mainstream economists agree that, in theory, any tax reduction will eventually lead to more private economic activity, hence more jobs. And the assumption (or hope) that cutting the tax will boost employment crosses party lines. President Obama has recently proposed a cut in some capital gains taxes for small businesses.

But even in theory, the increase is very small, and the real world there seems to be no connection at all. In November, 1978, Congress cut the top capital gains federal tax rate from 39 to 28 percent. Economic stagnation followed.

The top rate was cut again, to 20 percent, in the summer of 1981, while economic was growth was  a healthy 3.5 percent. In the next 12 months, the economy declined, entering the early stages of the 1982 recession, the worst post-war downturn until now. In both cases, unemployment rose in the period immediately following the tax cuts.

Higher capital gains taxes don’t necessarily hurt job growth, either. They didn’t in 1976, when a capital gains tax hike was followed by faster increases in the Gross Domestic Product and lower unemployment.

Even the responsible pro-capital gains cut economists (as opposed to the shills for chambers of commerce and similar groups) do not project substantial job increases from cutting capital gains taxes.

Appearing before the Joint Economic Committee in June of 1997, Allen Sinai (one of Sen. John McCain’s economic advisors during the 2008 campaign) said he estimated that a 50 percent cut in federal capital gains taxes would lead to more jobs, but not many.

“The increases relative to what might have happened otherwise are definitely significant, but small to modest in magnitude,” Sinai said, presenting tables suggesting an increase of 353,000 more jobs nationwide over a seven-year period.

That’s such a tiny increase – about 50,000 jobs a year nationwide – that it’s hard to see how anyone could possibly figure out, after the seven years had ended, just how many of the newly created jobs might have been due to the tax change. Other academic studies project even tinier job creation from cutting the capital gains tax.

But there is no doubt that a state need not create capital gains preferences to inspire business investment. The biggest investment boom of recent decades – if not ever – was in the high-tech, “dot com” start-ups during the 1990s, concentrated in California.

California “taxes capital gains the same as ordinary income,” reported (by email) Jean Ross of the California Budget Project in Sacramento. “We provide an exclusion for cap gains on the sale of a principal residence – the same as in fed law – but that’s it.”

There are even circumstances under which a lower capital gains tax could lead to fewer jobs. The cut, after all, does not provide a direct incentive to invest in a business; it provides a direct incentive to sell a business. That’s when the investor realizes a capital gain.

John Canning of the Vermont Software Developers’ Alliance, representing an industry that has been growing in Vermont and expects to add 150 high-paying jobs during the rest of this year, said his organization decided not to press for a capital gains tax preference now because it might cost jobs in Vermont.

“Venture capitalists would like to see the capital gains tax go away completely,” Canning said. “What concerns our association is that when someone sells his company, he’s often going to sell it to a bigger company out of state, and we’re not sure that’s good for Vermont.”

Canning said his industry is thriving and growing in Vermont because “people who grew up here or visited fell in love with Vermont,” and wanted to live in the state.

Starting a software company, Canning said, “doesn’t require a huge amount of capital.” A software startup entrepreneur, he said, primarily needs “an idea.” And also “enough bright people in an area and they feed off one another.” Thanks to institutions such as the University of Vermont, Fletcher Allen Health Care, and IBM, Canning said, Vermont provides that advantage also.

All this suggests that to attract more jobs, Vermont might worry less about taxes and more about enhancing amenities and attracting the kind of businesses that respond to those amenities. Something like the “statewide office of Innovation and Intellectual Property” proposed by State Sen. (and Democratic candidate for governor) Susan Bartlett would seem to have at least some real potential for providing a path to more job creation.

The same cannot be said for the capital gains tax cut just adopted.

As some of the lawmakers who agreed to it seem to know. Democrats went along with the move because they had to compromise with Republican Gov. Jim Douglas, who wanted deeper cuts in the tax. But also because they wanted to placate the state’s business community.

“It was a reasonable compromise, targeting it to Vermont businesses,” said Rep. Janet Ancel, a Calais Democrat who is on the House Ways and Means Committee. “Perception is reality, and the perception (in part of the business community) is that Vermont has a poor business climate. This is an attempt to remedy that.”

In other words, for Douglas the Republicans, cutting the capital gains tax was an article of faith, against which mere evidence is powerless. For the Democrats, it was a matter of politics, signaling the “we feel your pain” message to the business community and trying to tone down the “poor business climate” rhetoric.

And is the evidence for Vermont’s “poor business climate” any stronger than the evidence that cutting capital gains taxes will create jobs?

Tune in Monday.

The News Guy is taking today (and took last evening) off.

Come back Friday for serious tax talk