10/20/2005
Pick Your Study
CONTACT: Michael Diegel, (202) 314-2004
LANSING, Mich. -- Ah, that old saying: There are lies, damned lies, and statistics. In the battle of the studies and rankings, one cannot be blamed for being confused. One study ranks Michigan at the bottom of the economic barrel, and then, lo and behold, another claims we are at the top! To make matters more baffling, our elected officials are quick to grab the study that enhances their policies and positions, and claim it as the gospel in press releases and articles. Who and what are we to believe?
The latest testament to the confusion caused by conflicting studies and rankings is the announcement that Michigan moved to fifth place on the Small Business Survival Index 2005, compiled by the Washington, D.C.-based Small Business and Entrepreneurship Council, up from No. 6 last year. With bad news emanating from every quarter, one could understand an eagerness to send out jubilant press releases extolling the virtues of the study. However, when a study flies in the face of almost every economic indicator, an investigation into the construction of that study would be prudent before taking the results at face value.
A citizen's best guide to determine what is accurate and what is misleading is to use common sense and dig into the basis of the study or poll in question. With regard to the litmus test of common sense, that old Better Business Bureau adage is probably appropriate: "If it seems too good to be true, it probably is." If a study, poll, ranking or other research document's findings seem to run counter to conventional wisdom or a multitude of other studies, there is probably something amiss. At this point it is probably wise to scrutinize the source of the information and the data upon which it is based.
Two examples illustrate the point. At the beginning of March 2005, Site Selection magazine ranked Michigan second among the states for the most new and expanded facilities in the country. The state's primary development agency, the Michigan Economic Development Corporation, quickly seized upon the opportunity to publicize the ranking and take credit for a job well done.
Of course, such a ranking seemed out of sync with Department of Labor statistics, rankings by the Tax Foundation, the National Federation of Independent Business and others during the same time period. The reason for the contrast in the Site Selection rankings was quickly ferreted out by the Mackinac Center for Public Policy. It seems the magazine's rankings were based on what states reported to them. It quickly became apparent that the ranking was probably more of a measure of how much time and staff was devoted by a state to reporting data to the magazine than actual economic activity.
In the case of the Small Business Survival Committee's study, confusion over Michigan's misunderstood Single Business Tax is the culprit in a ranking that doesn't seem to add up when subjected to the common sense "smell test." A review of the method by which the study was constructed reveals that the study authors treated the state's SBT, a value-added tax primarily applied to a company's payroll, the same as a corporate income tax used by most other states. In this erroneous context, our 1.9 percent SBT rate compares favorably. The rate is then added in twice (once as the corporate tax rate and again as the S-Corp rate) with 24 other numerical factors to score the index rank.
The problem is that the SBT is not a corporate income tax, and to lump it in with all other states on that basis is a substantive error that skews the result and impugns the credibility of the study. A visit to page 56 of the Michigan Department of Treasury's report on the SBT would reveal that, "To raise the same revenue as the SBT, a 14.8 percent corporate income tax would need to be levied." Factoring this into the Small Business Survival Committee's ranking formula twice, as was done in the original calculation, Michigan's rank on the index would fall from number 5 to 50 with a recalculated score of 63.290. Washington, D.C., is ranked 51st with a score of 73.330.
Good news is hard to come by in Michigan, and it should give no one pleasure to see where we are and where we need to be when compared to the rest of the country. But a little more due diligence is in order before using a study to claim economic progress that doesn't exist. Such misinformation gives cover to policymakers that are resistant to making the changes in our tax and regulatory policies that are necessary to improve the business climate in Michigan. The average citizen in Michigan is not fooled by inaccurate studies. Neither are small-business owners.
