Lower Taxes May Help Attract New Investors – But Much, Much More Is Needed

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By Paolo von Schirach

May 1, 2013

WASHINGTON – The FT has a rather prominent story on how the state of New Mexico in the US plans to attract new investors via lowering corporate taxes. The article quotes Susana Martinez, the recently elected Republican Governor, speaking passionately about the need to be competitive, because investors, you know, do have choices. They can go anywhere else in the world. So, lowering tax burdens for corporation looks like a good idea.

Lower taxes get you in the game

Sure. A great idea. But, let me ask: “That’s it?” Is a lower corporate tax rate the essence of New Mexico’s investment  promotion strategy? If this is indeed the case, I suggest that policy makers study the issue a lot more. Of course competitive tax rates do matter. If any state has punitive taxation, investors will look elsewhere. But the point here is that lower taxes at best may get you in the game because, guess what, everybody else is doing the same thing. Only states or countries that know nothing about investment promotion strategies will keep high corporate taxes. But, once you have lowered your taxes, then you have to see how everything else compares with what competitors may be able to offer. And the list of important items is as long as it is critical.

The broader investment climate

First of all, investors want qualified manpower and the reassurance that the state has the good schools and universities that will produce it.  If the potential investor is a high tech company, decision-makers scouting for locations want to see good or superior universities, with state of the art R&D facilities. Investors want to see, in place, a network of potential high quality suppliers and vendors. Investors want to see modern, cost effective infrastructure and logistics. They want to see how their supply chain will be positively affected by moving or adding operations in that particular state.

And, yes, they want to know about quality of life. They want good schools for their kids, recreation opportunities, low crime levels, affordable real estate, culture, nice weather and state of the art communication networks. 

Yes, they want all that. Of course, they will not find all of it in any given location. But they will chose the place that has the best mix. New Mexico does have impressive federal laboratories (think of Los Alamos) working on cutting edge energy issues and other high tech sectors. That’s an important advantage. Still, New Mexico is a rather poor state, with mediocre to bad public schools; while it has more than its share of minorities who do not speak much English. It is not centrally located. It offers no special logistics infrastructure.

The idea that lowering corporate tax rates will –by itself– trigger an avalanche of new investments into New Mexico, (or anywhere else for that matter), is rather naive. In fact, quite silly.

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