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Archive for the ‘Illinois’ Category

Last year, I said the nation’s most important referendum was the proposal to emasculate Colorado’s Taxpayer Bill of Rights (I was delighted when voters said no to the pro-spending lobbies and preserved TABOR).

This year’s most important referendum is taking place in November in Illinois, where pro-spending lobbies are very anxious to repeal the state’s flat tax.

If they succeed, the steady flow of taxpayers out of Illinois will become a torrent.

That’s because the flat tax is the only semi-decent feature of the state’s fiscal policy. If it goes, there won’t be any hope.

My buddy from the Illinois Policy Institute, Orphe Divounguy, has a column in today’s Wall Street Journal about the dismal fiscal and economic outlook in the Land of Lincoln.

Long the economic hub of the Midwest, Illinois has lost more than 850,000 residents to other states during the past decade. The state has been shrinking for six consecutive years and suffered the largest raw population decline of any state in the 2010s. …Growing government debt and a crushing tax burden are depressing economic growth. State spending is up, but personal-income growth is lagging. Since 2000, Illinois’s per capita personal income growth has been 21% lower than the national average. …ratings firms are paying attention. Illinois’s credit rating is one notch above junk. …Illinois’s public pension payments already consume nearly a third of the state budget, yet the unfunded liability—which the state currently pegs at $137 billion, though others put the figure much higher—continues to rise. …Since 2000, Illinois has increased pension spending by more than 500%.

Orphe then points out that politicians in the state have been raising taxes with depressing regularity.

Needless to say, that never seems to solve the problem (a point I recently made when looking at fiscal policy in Washington).

Illinois has a culture of trying—and failing—to tax its way out of its problems. In 2011 then-Gov. Pat Quinn approved a temporary tax hike aimed at making a dent in the state’s $8 billion in unpaid bills. By 2014, Illinois still had a $6.6 billion bill backlog, and lawmakers were calling for families and businesses to give up more money. Another permanent income-tax increase came in 2017, but again more taxes failed to solve Illinois’s problems. The problems, in fact, got worse. In his freshman year, Gov. J.B. Pritzker signed into law 20 new taxes and fees totaling nearly $4.6 billion, including a doubling of the gasoline tax. Now Mr. Pritzker wants a progressive income tax he claims will really solve the issue.

The bottom line is that politicians in Illinois want ever-increasing taxes to finance ever-increasing pensions for state and local bureaucrats.

This cartoon from Eric Allie nicely summarizes the attitude of the state’s corrupt political class.

To be sure, there are plenty of states that have big fiscal holes because politicians have showered bureaucrats with overly generous compensation packages.

What presumably makes Illinois unique, Orphe explains, is that retired government workers get annual adjustments that are much greater than inflation.

Which means that there’s a simple and fair solution.

Illinois taxpayers can save $50 billion over 25 years, and dollars can be freed to support their eroding public services. Policy makers can finally shrink Illinois’s pension liability by reducing the main driver of its growth: the cost-of-living adjustment, or COLA. Currently, the COLA doesn’t reflect any actual cost-of-living increase, since it isn’t pegged to inflation. By simply replacing the existing guaranteed 3% compounding postretirement raise with a true COLA pegged to inflation, among other modest changes, Illinois can save $2.4 billion in the first year alone. No current retiree would see a decrease in his pension check. Current workers would preserve their core benefit.

P.S. I don’t know how long this policy has existed. If it’s a long-standing policy, Illinois bureaucrats actually were net losers in the pre-Reagan era when the U.S. suffered from high inflation.

P.P.S. The ultimate solution is to shift bureaucrats to “defined contribution” retirement plans, akin to the IRAs and 401(K)s that exist in the private sector.

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The most important referendum in 2019 was the effort to get Colorado voters to eviscerate the Taxpayer Bill of Rights. Fortunately, the people of the Centennial State comfortably rejected the effort to bust the state’s successful spending cap.

The most important referendum in 2020 will ask voters in Illinois whether they want to get rid of the state’s flat tax and give politicians the leeway to arbitrarily impose higher rates on targeted taxpayers.

I’ve written many times about how a flat tax is far less destructive than so-called progressive taxation.

And I’ve also written that Illinois’ flat tax, enshrined in the state constitution, is the only decent feature of an otherwise terrible fiscal system.

So if the politicians convince voters to get rid of the flat tax, it will hasten the state’s economic decline (if you want more information, I strongly recommend perusing the numerous reports prepared by the Illinois Policy Institute).

Today, though, I want to focus on politics rather than economics.

To be more specific, I want to expose how supporters of higher taxes are using disingenuous tactics.

For instance, the state’s governor, J.B. Pritzker, warns that he’ll have to impose big spending cuts if voters don’t approve the referendum.

Gov. J.B. Pritzker said the state’s next budget will be balanced, but said if voters don’t approve a progressive income tax in November, he would have to reduce state spending across the board in future years. …the governor said 15 percent cuts in state spending would be needed across the board. …Illinois’ most recent budget called for spending about $40 billion dollars in state money. The state spends another $40 billion of federal tax money. …Pritzker is set to deliver his budget address on Feb. 19. He said he will propose a balanced budget to begin in July without relying on revenue from the proposed progressive income tax.

For what it’s worth, I actually think it would be good news if the state was forced to reduce the burden of government spending.

But that’s actually not the case.

How do I know Pritzker is lying?

Because his own budget documents project that state revenues (highlighted in red) are going to increase by nearly 2 percent annually under current law.

In other words, he wants a tax increase so he can increase overall spending at an even faster pace.

Of course, his tax increase also will increase the pace of taxpayers fleeing the state, which is why the referendum is actually a form of slow-motion fiscal suicide.

But let’s set that aside and examine another lie. Or, to be more accurate, a delayed lie.

The politicians in Illinois already have approved legislation to impose tax increases on the state’s most successful taxpayers, though the higher rates won’t actually become law until and unless the referendum is approved.

In hopes of bribing voters to approve the referendum, supporters assert that the other 97 percent of state taxpayers will get a cut.

That’s true. Most taxpayers will get a tiny reduction compared to the current 4.95 percent tax rate.

But how long will that last? Especially considering that the state’s long-run fiscal outlook is catastrophically bad?

The bottom line is that approving the referendum is like unlocking all the cars in a crime-ridden neighborhood. The expensive models will be the immediate targets, but it’s just a matter of time before everyone’s vehicle gets hit.

Indeed, this warning has such universal application that I’m going to make it my sixth theorem.

By the way, this theorem also applies when an income tax gets imposed, as happened with the United States in 1913 (and also a lesson that New Jersey residents learned in the 1970s and Connecticut residents learned in the 1990s).

P.S. Here are my other theorems.

  • The “First Theorem” explains how Washington really operates.
  • The “Second Theorem” explains why it is so important to block the creation of new programs.
  • The “Third Theorem” explains why centralized programs inevitably waste money.
  • The “Fourth Theorem” explains that good policy can be good politics.
  • The “Fifth Theorem” explains how good ideas on paper become bad ideas in reality.

P.P.S. Pritzker is a hypocrite because he does everything he can to minimize his own tax burden while asking for the power to take more money from everyone else.

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Yesterday’s column was my annual end-of-year round-up of the best and worst developments of the concluding year.

Today I’ll be forward looking and give you my hopes and fears for the new year, which is a newer tradition that began in 2017 (and continued in 2018 and 2019).

With my glass-half-full outlook, we’ll start with the things I hope will happen.

Supreme Court strikes down civil asset forfeiture – It is nauseating that bureaucrats can steal property from citizens who have never been convicted of a crime. Or even charged with a crime. Fortunately, this disgusting practice already has attracted attention from Clarence Thomas and other sound-thinking Justices on the Supreme Court. Hopefully, this will produce a decision that ends this example of Venezuela-style government thuggery.

Good free-trade agreements for the United Kingdom – This is a two-pronged hope. First, I want a great agreement between the U.S. and the U.K., based on the principle of mutual recognition. Second, I want the best-possible agreement between the U.K. and the E.U., which will be a challenge since the political elite in Brussels has a spiteful desire to “punish” the British people for supporting Brexit.

Maduro’s ouster in Venezuela – I already wished for this development in 2018 and 2019, so this is my “Groundhog Day” addition to the list. But if I keep wishing for it, sooner or later it will happen and I’ll look prescient. But I actually don’t care about whether my predictions are correct, I just want an end to the horrible suffering for the people of Venezuela.

Here are the things I fear will happen in 2020.

A bubble bursts – I hope I’m wrong (and that may be the case since I’ve been fretting about it for a long time), but I fear that financial markets are being goosed by an easy-money policy from the Federal Reserve. Bubbles feel good when they’re expanding, but last decade should have taught us that they can be very painful when they pop.

A loss of economic liberty in Chile and/or Hong Kong – As shown by Economic Freedom of the World, there are not that many success stories in the world. But we can celebrate what’s happened in Hong Kong since WWII and what’s happened in Chile since the late 1970s. Economic liberty has dramatically boosted prosperity. Unfortunately, Hong Kong’s liberty is now being threatened from without and Chile’s liberty is now being threatened from within.

Repeal of the Illinois flat tax – The best approach for a state is to have no income tax, and a state flat tax is the second-best approach. Illinois is in that second category thanks to a long-standing provision of the state’s constitution. Needless to say, this irks the big spenders who control the Illinois government and they are asking voters this upcoming November to vote on whether to bust the flat tax and open the floodgates for an ever-growing fiscal burden. By the way, it’s quite likely that I’ll be including the Massachusetts flat tax on this list next year.

I’ll also add a special category for something that would be both good and bad.

Trump gets reelected – Because Trump is producing better tax policy and better regulatory policy, and because of my hopes for judges who believe in the Constitution’s protections of economic liberty, it would be good if he won a second term.

Trump gets reelected – Because Trump is producing worse spending policy and worse trade policy, and because of my concerns never-ending Keynesian monetary policy from the Federal Reserve, it would be bad if he won a second term.

Happy New Year, everyone.

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Proponents of bigger government sometimes make jaw-dropping statements.

I even have collections of bizarre assertions by both Hillary Clinton and Barack Obama.

What’s especially shocking is when statists twist language, such as when they claim all income is the “rightful property” of government and that people who are allowed to keep any of their earnings are getting “government handouts.”

A form of “spending in the tax code,” as they sometimes claim.

Maybe we should have an “Orwell Award” for the most perverse misuse of language on tax issues.

And if we do, I have two potential winners.

The governor of Illinois actually asserted that higher income taxes are needed to stop people from leaving the state.

Gov. J.B. Pritzker…blamed the state’s flat income tax for Illinois’ declining population. …“The people who have been leaving the state are actually the people who have had the regressive flat income tax imposed upon them, working-class, middle-class families,” Pritzker said. Pritzker successfully got the Democrat-controlled state legislature to pass a ballot question asking voters on the November 2020 ballot if Illinois’ flat income tax should be changed to a structure with higher rates for higher earners. …Pritzker said he’s set to sign budget and infrastructure bills that include a variety of tax increases, including a doubling of the state’s gas tax, increased vehicle registration fees, higher tobacco taxes, gambling taxes and other tax increases

I’ve written many times about the fight to replace the flat tax with a discriminatory graduated tax in Illinois, so no need to revisit that issue.

Instead, I’ll simply note that Pritzker’s absurd statement about who is escaping the state not only doesn’t pass the laugh test, but it also is explicitly contradicted by IRS data.

In reality, the geese with the golden eggs already are voting with their feet against Illinois. And the exodus will accelerate if Pritzker succeeds in killing the state’s flat tax.

Another potential winner is Martin Kreienbaum from the German Finance Ministry. As reported by Law360.com, he asserted that jurisdictions have the sovereign right to have low taxes, but only if the rules are rigged so they can’t benefit.

A new global minimum tax from the Organization for Economic Cooperation and Development is not meant to infringe on state sovereignty…, an official from the German Federal Ministry of Finance said Monday. The OECD’s work plan…includes a goal of establishing a single global rate for taxation… While not mandating that countries match or exceed it in their national tax rates, the new OECD rules would allow countries to tax the foreign income of their home companies if it is taxed below that rate. …”We respect the sovereignty for states to completely, freely set their tax rates,” said Martin Kreienbaum, director general for international taxation at the German Federal Ministry of Finance. “And we restore sovereignty of other countries to react to low-tax situations.” …”we also believe that the race to the bottom is a situation we would not like to accept in the future.”

Tax harmonization is another issue that I’ve addressed on many occasions.

Suffice to say that I find it outrageous and disgusting that bureaucrats at the OECD (who get tax-free salaries!) are tying to create a global tax cartel for the benefit of uncompetitive nations.

What I want to focus on today, however, is how the principle of sovereignty is being turned upside down.

From the perspective of a German tax collector, a low-tax jurisdiction is allowed to have fiscal sovereignty, but only on paper.

So if a place like the Cayman Islands has a zero-income tax, it then gets hit with tax protectionism and financial protectionism.

Sort of like having the right to own a house, but with neighbors who have the right to set it on fire.

P.S. Trump’s Treasury Secretary actually sides with the French and supports this perverse form of tax harmonization.

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If the people who advocate higher taxes really think it’s a good idea to give politicians more cash, why don’t they voluntarily send extra money with their tax returns?

Massachusetts actually makes that an easy choice since state tax forms give people the option of paying extra, yet tax-loving politicians such as Elizabeth Warren and John Kerry never avail themselves of that opportunity.

And the Treasury Department has a website for people who want to give extra money to the federal government, yet proponents of higher taxes (at least for you and me) never lead by example.

For lack of a better phrase, let’s call this type of behavior – not choosing to pay extra tax – conventional hypocrisy.

But what about politicians who support higher taxes while dramatically seeking to reduce their own tax payments? I guess we should call that nuclear-level hypocrisy.

And if there was a poster child for this category, it would be J.B. Pritzker, the Illinois governor who is trying to replace his state’s flat tax with a money-grabbing multi-rate tax.

The Chicago Sun Times reported late last year that Pritzker has gone above and beyond the call of duty to make sure his money isn’t confiscated by government.

…more than $330,000 in property tax breaks and refunds that…J.B. Pritzker received on one of his Gold Coast mansions — in part by removing toilets… Pritzker bought the historic mansion next door to his home, let it fall into disrepair — and then argued it was “uninhabitable” to win nearly $230,000 in property tax breaks. …The toilets had been disconnected, and the home had “no functioning bathrooms or kitchen,” according to documents Pritzker’s lawyers filed with Cook County Assessor Joseph Berrios.

Wow, maybe I should remove the toilets from my house and see if the kleptocrats in Fairfax County will slash my property taxes.

And since I’m an advocate of lower taxes (for growth reasons and for STB reasons), I won’t be guilty of hypocrisy.

Though Pritzker may be guilty of more than that.

According to local media, the tax-loving governor may face legal trouble because he was so aggressive in dodging the taxes he wants other people to pay.

Democratic Illinois Gov. JB Pritzker, his wife and his brother-in-law are under federal criminal investigation for a dubious residential property tax appeal that dogged him during his gubernatorial campaign last year, WBEZ has learned. …The developments demonstrate that the billionaire governor and his wife may face a serious legal threat arising from their controversial pursuit of a property tax break on a 126-year-old mansion they purchased next to their Gold Coast home. …The county watchdog said all of that amounted to a “scheme to defraud” taxpayers out of more than $331,000. …Pritzker had ordered workers to reinstall one working toilet after the house was reassessed at a lower rate, though it’s unclear whether that happened.

This goes beyond nuclear-level hypocrisy – regardless of whether he’s actually guilty of a criminal offense.

Though he’s not alone. Just look at the Clintons. And Warren Buffett. And John Kerry. And Obama’s first Treasury Secretary. And Obama’s second Treasury Secretary.

Or tax-loving international bureaucrats who get tax-free salaries.

Or any of the other rich leftists who want higher taxes for you and me while engaging in very aggressive tax avoidance.

To be fair, my leftist friends are consistent in their hypocrisy.

They want ordinary people to send their kids to government schools while they send their kids to private schools.

And they want ordinary people to change their lives (and pay more taxes) for global warming, yet they have giant carbon footprints.

P.S. There is a quiz that ostensibly identifies hypocritical libertarians.

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When I gave readers an opportunity to select their favorite political cartoonist back in 2013, they picked Michael Ramirez.

And I can understand, given the excellent options that I shared (here, here, here, and here).

But I now think I overlooked his true masterpiece, at least if salience is an issue. The cartoon he produced on politicians and bureaucrat unions perfectly identifies the problem that has produced gaping fiscal shortfalls in so many states and communities.

Simply stated, politicians and bureaucrats have figured out how to gang up against taxpayers.

The Chicago Tribune recently opined on this horrific example.

…a controversial state law…allowed a lobbyist for the Illinois Federation of Teachers, David Piccioli, to become certified as a substitute teacher in December 2006 by working one day at a Springfield elementary school — and to buy pension credit for his 10 previous years working as a lobbyist. That sweet deal qualified him for a pension windfall from a teachers retirement fund that as of late 2018 carried an unfunded liability of more than $75 billion-with-a-B. Because he also draws a pension from a previous job as a House Democratic aide, Piccioli’s total pension income now rises to nearly $100,000.

Sadly, Illinois courts routinely acquiesce to this kind of scam.

…the court upheld a dubious loophole that allowed government employees who left those jobs to work for their union in the private sector to still qualify for a public pension — with payouts based on their much higher salaries in their union roles. One example: Former Chicago labor boss Dennis Gannon, who started out working for the city, was able to retire at age 50 with a city pension based on his union salary of at least $240,000. The Supreme Court upheld that arrangement too.

Perhaps those actually were correct legal decisions.

But, if so, that underscores my original point about politicians and bureaucrat union working together to fleece taxpayers.

This story underscores the unfairness of a system that provides much higher levels of compensation for government bureaucrats compared to those toiling in the economy’s productive sector.

But it also can be seen as a Exhibit A for why Illinois is a fiscal black hole. Which is, of course, why the state’s politicians are so anxious and determined to get rid of the state’s flat tax.

And this explains why productive people are leaving.

Needless to say, this won’t end well.

P.S. I’m not going to put Mr. Piccioli in the Bureaucrat Hall of Fame. That high honor is reserved for people who actually had government jobs for longer than one day (such as the Philadelphia bureaucrat who “earned” a $50,000 annual pension after being employed for just 2-1/2 years. As a consolation prize, I will instead offer him up as a potential candidate for Bureaucrat of the Year.

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I wrote a couple of weeks ago about how New York is committing slow-motion fiscal suicide.

The politicians in Illinois must have noticed because they now want (another “hold my beer” moment?) to accelerate the already-happening collapse of their state.

The new governor, J.B. Pritzker, wants to undo the state’s 4.95 percent flat tax, which is the only decent feature of the Illinois tax system.

And he has a plan to impose a so-called progressive tax with a top rate of 7.95.

Here are some excerpts from the Chicago Tribune‘s report., starting with the actual plan.

Democratic Gov. J.B. Pritzker embarked on a new and potentially bruising political campaign Thursday by seeking to win public approval of a graduated-rate income tax that he contended would raise $3.4 billion by increasing taxes for the wealthy…for his long-discussed plan to replace the state’s constitutionally mandated flat-rate income tax. Currently, all Illinois residents are taxed at 4.95 percent… Pritzker’s proposal is largely reliant on raising taxes significantly on residents making more than $250,000 a year, with those earning $1 million and up taxed at 7.95 percent of their total income. …The corporate tax rate would increase from the current 7 percent to 7.95 percent, matching the top personal rate. …The governor’s proposal would give Illinois the second-highest top marginal tax rate among its neighboring states.

And here’s what would need to happen for the change to occur.

Before Pritzker’s plan can be implemented, three-fifths majorities in each chamber of the legislature must approve a constitutional amendment doing away with the flat tax requirement. The measure would then require voter approval, which couldn’t happen until at least November 2020. …Democrats hold enough seats in both chambers of the legislature to approve the constitutional amendment without any GOP votes. Whether they’ll be willing to do so remains in question. Democratic leaders welcomed Pritzker’s proposal… voters in 2014 endorsed the idea by a wide margin in an advisory referendum.

The sensible people on the Chicago Tribune‘s editorial board are not very impressed, to put it mildly.

…how much will taxes increase under a rate structure Pritzker proposed? You might want to cover your eyes. About $3.4 billion annually… That extraction of dollars from taxpayers’ pockets would be in addition to roughly $5 billion raised annually in new revenue under the 2017 income tax hike. …How did Springfield’s collection of all that new money work out for state government and taxpayers? Here’s how: Illinois remains deeply in debt, continues to borrow to pay bills, faces an insurmountable unfunded pension liability and is losing taxpayers who are fed up with paying more. The flight of Illinoisans to other states is intensifying with 2018’s loss of 45,116 net residents, the worst of five years of consistent, dropping population. …Illinois needs to be adding more taxpayers and businesses, not subtracting them. When politicians raise taxes, they aren’t adding. A switch to a graduated tax would eliminate one of Illinois’ only fishing lures to attract taxpayers and jobs: its constitutionally protected flat income tax. …Pritzker’s proposal, like each tax hike before it, was introduced with no meaningful reform on the spending side of the ledger. This is all about collecting more money. …In fact, the tax hike would come amid promises of spending new billions.

And here’s a quirk that is sure to backfire.

For filers who report income of more than $1 million annually, the 7.95 percent rate would not be marginalized; meaning, it would be applied to every dollar, not just income of more than $1 million. Line up the Allied moving vans for business owners and other high-income families who’ve had a bellyful of one of America’s highest state and local tax burdens.

The Tax Foundation analyzed this part of Pritzker’s plan.

This creates a significant tax cliff, where a person making $1,000,000 pays $70,935 in taxes, while someone earning one dollar more pays $79,500, a difference of $8,565 on a single dollar of income.

That’s quite a marginal tax rate. I suspect even French politicians (as well as Cam Newton) might agree that’s too high.

Though I’m sure that tax lawyers and accountants will applaud since they’ll doubtlessly get a lot of new business from taxpayers who want to avoid that cliff (assuming, of course, that some entrepreneurs, investors, and business owners actually decide to remain in Illinois).

While the tax cliff is awful policy, it’s actually relatively minor compared to the importance of this table in the Tax Foundation report. It shows how the state’s already-low competitiveness ranking will dramatically decline if Pritzker’s class-warfare plan is adopted.

The Illinois Policy Institute has also analyzed the plan.

Unsurprisingly, there will be fewer jobs in the state, with the losses projected to reach catastrophic levels if the new tax scheme is adjusted to finance all of the Pritzker’s new spending.

And when tax rates go up – and they will if states like Connecticut, New Jersey, and California are any indication – that will mean very bad news for middle class taxpayers.

The governor is claiming they will be protected. But once the politicians get the power to tax one person at a higher rate, it’s just a matter of time before they tax everyone at higher rates.

Here’s IPI’s look at projected tax rates based on three different scenarios.

The bottom line is that the middle class will suffer most, thanks to fewer jobs and higher taxes.

Rich taxpayer will be hurt as well, but they have the most escape options, whether they move out of the state or rely on tax avoidance strategies.

Let’s close with a few observations about the state’s core problem of too much spending.

Steve Cortes, writing for Real Clear Politics, outlines the problems in his home state.

…one class of people has found a way to prosper: public employees. …over 94,000 total public employees and retirees in Illinois command $100,000+ salaries from taxpayers…former Chicago Mayor Richard M. Daley, who earned a $140,000 pension for his eight years of service in the Illinois legislature. …Such public-sector extravagance has fiscally transformed Illinois into America’s Greece – only without all the sunshine, ouzo, and amazing ruins.

So nobody should be surprised to learn that the burden of state spending has been growing at an unsustainable rate.

Indeed, over the past 20 years, state spending has ballooned from $34 billion to $86 billion according to the Census Bureau. At the risk of understatement, the politicians in Springfield have not been obeying my Golden Rule.

And today’s miserable fiscal situation will get even worse in the near future since Illinois is ranked near the bottom when it comes to setting aside money for lavish bureaucrat pensions and other retirement goodies.

Indeed, paying off the state’s energized bureaucrat lobby almost certainly is the main motive for Pritzker’s tax hike. As as happened in the past, this tax hike is designed to finance bigger government.

Yet that tax hike won’t work.

Massive out-migration already is wreaking havoc with the state’s finances. And if Pritzker gets his tax hike, the exodus will become even more dramatic.

P.S. Keep in mind, incidentally, that all this bad news for Illinois will almost certainly become worse news thanks to the recent tax reform. Restricting the state and local tax deduction means a much smaller implicit federal subsidy for high-tax states.

P.P.S. I created a poll last year and asked people which state will be the first to suffer a fiscal collapse. Illinois already has a big lead, and I won’t be surprised if that lead expands if Pritzker is able to kill the flat tax.

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I’ve written many times about people and businesses escaping high-tax states and moving to low-tax states.

This tax-driven migration rewards states with good policy and punishes those with bad policy.

And now we have some new data.

The Wall Street Journal recently opined on the updated numbers.

…some states are booming while others are suffering a European-style sclerosis of population loss and slow economic growth. …The eight fastest-growing states by population last year…also experienced rapid employment and GDP growth spurred by low tax rates and policies generally friendly to business and job creation. Nevada, Arizona, Texas, Washington, Utah, Florida and Colorado ranked among the eight states with the fastest job growth this past year, according to the Bureau of Labor Statistics. Nevada, Texas, Washington and Florida have no income tax. …Then there’s California. Despite its balmy weather and thriving tech industry, the Golden State last year lost more people to other states than it gained from foreign immigration. Since 2010, a net 710,000 people have left California for other states. …New York Gov. Andrew Cuomo recently blamed cold weather for the state’s population exodus, but last year frigid New Hampshire with no income tax attracted 3,900 newcomers from other states. …Illinois’s population has declined by 157,000 over the past five years… Cold weather? While Illinois’s population has declined by 0.8% since 2010, Indiana’s has grown 3.1% and Wisconsin’s by 2.2%.

Here’s my favorite part of the editorial.

America as a whole can thank the Founders for creating a federalist system that allows the economic and political safety valve of interstate policy competition.

Amen. Federalism is great for a wide range of reasons, but I especially like that people have the freedom to escape when policy is decentralized.

Companies escape high taxes.

Honeywell International Inc. is snubbing New Jersey and heading south. …Honeywell’s move follows other companies that have moved corporate offices out of states with elevated costs of living and high taxes, including General Electric Co.’s relocation of its headquarter to Boston from Connecticut. Those costs were exacerbated by a new law last year that removed state income-tax deductions on federal taxes. North Carolina has a lower state income tax than New Jersey for higher-paid employees.

Former governors escape high taxes.

Gov. Paul LePage said Monday that he plans to move to Florida for tax reasons… LePage and his wife, Ann, already own a house in Florida and often vacation there. He said he would be in Maine from April to September. Asked where he would maintain his legal residency, LePage replied Florida. …”I have a house in Florida. I will pay no income tax and the house in Florida’s property taxes are $2,000 less than we were paying in Boothbay. … At my age, why wouldn’t you conserve your resources and spend it on your family instead of on taxes?” …LePage often has cited Maine’s income tax – currently topping out at 7.15 percent, down from a high of 8.5 percent when he took office – as an impediment to economic growth and attracting/retaining residents.

Even sports stars avoid class-warfare tax regimes.

Bryce Harper and Manny Machado…will “take home” significantly higher or lower pay depending on which teams sign them and the applicable income tax rates in the states where those teams are based. This impact could be worth tens of millions of dollars. …For example, assume the Cubs and Dodgers offer identical eight-year, $300 million contracts to Machado. Lozano would warn the Dodgers that their offer is decidedly inferior. As a Dodger, Machado’s million-dollar wages would be subject to the top bracket of California’s state income tax rate. At 13.3%, it is the highest rate in the land. In contrast, as a Cub, Machado would be subject to the comparatively modest 4.95% Illinois income tax rate. …the difference in after-tax value of these two $300 million contracts would be $14 million.

Though Lozano needs to warn Machado that the recent election results significantly increase the danger that Illinois politicians will finally achieve their long-held goal of changing the state constitution and replacing the flat tax with a class-warfare system.

Since we’re talking about the Land of Lincoln, it’s worth noting that the editors at the Chicago Tribune understand the issue.

Every time a worker departs, the tax burden on those of us who remain grows. The release on Wednesday of new census data about Illinois was alarming: Not only has the flight of citizens continued for a fifth straight year, but the population loss is intensifying. This year’s estimated net reduction of 45,116 residents is the worst of these five losing years. …Residents fed up with the economic climate here are heading for less taxaholic, jobs-friendlier states. …Many of them left because they believed Illinois is headed in the wrong direction. Because Illinois politicians have raised taxes, milked employers and created enormous public indebtedness that the pols want to address with … still more taxation. …How bad does the Illinois Exodus have to get before its dominant politicians understand that their debt-be-damned, tax-and-spend policies are ravaging this state?

Wow, no wonder Illinois is perceived to be the first state to suffer a fiscal collapse.

Let’s now zoom out and consider some national implications.

Chris Edwards took a close look at the data and crunched some numbers.

The new Census data confirms that people are moving from tax-punishing places such as California, Connecticut, Illinois, New York, and New Jersey to tax-friendly places such as Florida, Idaho, Nevada, Tennessee, and South Carolina. In the chart, each blue dot is a state. The vertical axis shows the one-year Census net interstate migration figure as a percentage of 2017 state population. The horizontal axis shows state and local household taxes as a percentage of personal income in 2015. …On the right, most of the high-tax states have net out-migration. …On the left, nearly all the net in-migration states have tax loads of less than 8.5 percent. …The red line is fitted from a simple regression that was highly statistically significant.

Here’s the chart.

Professor Glenn Reynolds wrote a column on tax migration for USA Today.

He starts by warning states that it’s a very bad recipe to repel taxpayers and attract tax consumers.

IRS data show that taxpayers are migrating from high-tax states like New York, Illinois, and California to low-tax states like Texas and Florida. …In time, if taxpayers tend to migrate from high-tax states to low-tax states, and if people receiving government benefits tend to stay in place or migrate from lower-benefit states to higher-benefit states, then over time lower-tax states will tend to accumulate more people with high earnings, while higher-benefit states will tend to accumulate more people who live on the dole. …if high-benefits states are also high-tax states (as is often the case) since then states with high benefits will accumulate more people who draw on them, while shedding the taxpayers they need to support them. The problem is that the result isn’t stable: High-tax, high-benefit states will eventually go bankrupt because they won’t retain enough taxpayers to support their welfare spending.

He then makes a very interesting observation about the risk that people who leave states such as New York, Illinois, California, and New Jersey may bring their bad voting habits to their new states.

…migrants from high tax states might bring their political attitudes with them, moving to new, low-tax states for the economic opportunity but then supporting the same policies that ruined the states they left. This seems quite plausible, alas, and I’ve heard Coloradans lament that the flow of Californians to their state involved a lot of people doing just that. …If I were one of those conservative billionaires…I might try spending some of the money on some…sort of welcome wagon for blue state migrants to red states. Something that would explain to them why the place they’re moving to is doing better than the place they left, and suggesting that they might not want to vote for the same policies that are driving their old home states into bankruptcy.

Glenn makes a very good point.

As part of my work on defending TABOR in Colorado, I often run into people who fret that the state has moved in the wrong direction because of migration from left-leaning states.

Though Chuck DeVore shared some data on how migrants to Texas are more conservative than people born in the state.

I’ll close today’s column with a helpful map from the Tax Foundation.

All you really need to know is that you should move if you live in a blue state and you should erect a no-leftists-allowed sign if you live in a gray state.

P.S. Everything I wrote about the benefits of tax migration between states also applies to tax migration between nations.

I will never stop defending the right of labor and capital to escape high-tax regimes. I especially enjoy the hysterical reactions of folks on the left, who think that my support of fiscal sovereignty means that I’m “trading with the enemy,” being disloyal to my government, or that I should be tossed in jail.

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Even though I wrote about proposed tax increases in Illinois just 10 days ago, it’s time to revisit the issue because the Tax Foundation just published a very informative article about the state’s self-destructive fiscal policy.

It starts by noting that the aggregate tax burden is higher in Illinois than it is in adjoining states.

Just what are Illinois’ neighbors doing on taxes? They’re taxing less, for starters. In Illinois, state and local taxes account for 9.3 percent of state income. The state and local taxes in Illinois’ six neighboring states account, in aggregate, for 8.0 percent of the income of those states.

Here’s the table showing the gap between Illinois and its neighbors. And it’s probably worth noting that the tax gap is the largest with the two states – Indiana and Missouri – that have the longest borders with Illinois.

While the aggregate tax burden is an important measure, I’ve explained before that it’s also important to focus on marginal tax rates. After all, that’s the variable that determines incentives for productive behavior since it measures how much the government confiscates when investors and entrepreneurs generate additional wealth.

And this brings us to the most important point in the article. Illinois politicians want to move in the wrong direction on marginal tax rates while neighboring jurisdictions are moving in the right direction.

Except for Iowa, all of Illinois’ neighbors have cut their income taxes since Illinois adopted its “temporary” income tax increases in 2011—and Iowa is on the verge of adopting a tax reform package that cuts individual income tax rates… Over the same period, Illinois’ single-rate income tax was temporarily raised from 3 to 5 percent, then allowed to partially sunset to 3.75 percent before being raised to the current 4.95 percent rate. A 1.5 percent surtax on pass-through business income brings the rate on many small businesses to 6.45 percent. Now there are calls to amend the state constitution to allow graduated-rate income taxes, with proposals circulating to create a top marginal rate as high as 9.85 percent (11.35 percent on pass-through businesses).

Here’s the chart showing the top rate in various states in 2011, the top rates today, and where top tax rates could be in the near future.

What’s especially remarkable is that Illinois politicians are poised to jack up tax rates just as federal tax reform has significantly reduced the deduction for state and local taxes.

For all intents and purposes, they’re trying to drive job creators out of the state (a shift that already has been happening, but now will accelerate).

Normally, when I write that a jurisdiction is committing fiscal suicide, I try to explain that it’s a slow-motion process. Illinois, however, could be taking the express lane. No wonder readers overwhelmingly picked the Land of Lincoln when asked which state will be the first to suffer a fiscal collapse.

P.S. Illinois politicians claim they want to bust the flat tax so they can impose higher taxes on the (supposedly) evil rich. High-income taxpayers doubtlessly will be the first on the chopping block, but I can say with 99.99 percent certainty that class-warfare tax increases will be a precursor to higher taxes on everybody.

P.P.S. Illinois residents should move to states with no income taxes. But if they only want to cross one border, Indiana would be a very good choice. And Kentucky just shifted to a flat tax, so that’s another potential option.

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When I did a poll earlier this year, asking which state would be the first to suffer a fiscal crisis, I wasn’t terribly surprised that Illinois wound up in first place.

But I was surprised by the margin. Even though there’s a good case to be made for basket-case jurisdictions such as New Jersey, California, and Connecticut, Illinois not only got a plurality of votes, it received an absolute majority.

Based on what’s happening in the Land of Lincoln, it appears that state politicians want to receive a supermajority of votes. There’s pressure for ever-higher taxes to finance an ever-more-bloated bureaucracy.

And taxpayers are voting with their feet.

The Wall Street Journal editorialized about the consequences of the state’s self-destructive fiscal policy.

Democrats in Illinois ought to be especially chastened by new IRS data showing an acceleration of out-migration. The Prairie State lost a record $4.75 billion in adjusted gross income to other states in the 2015 tax year, according to recently IRS data released. That’s up from $3.4 billion in the prior year. …Florida with zero income tax was the top destination for Illinois expatriates… What’s the matter with Illinois? Too much for us to distill in one editorial, but suffice to say that exorbitant property and business taxes have retarded economic growth. …Taxes may increase as Democrats scrounge for cash to pay for pensions. …Illinois’s unfunded pension liabilities equalled 22.8% of residents’ personal income last year, compared to a median of 3.1% across all states and 1% in Florida. …Illinois’s economy has been stagnant, growing a meager 0.9% on an inflation-adjusted annual basis since 2012—the slowest in the Great Lakes and half as fast as the U.S. overall. This year nearly 100,000 individuals have left the Illinois labor force.

Here’s a chart showing a very depressing decline in the state’s labor force.

By the way, I wonder whether the chart would look even worse if government bureaucrats weren’t included.

The Chicago Tribune has a grim editorial about what’s happening.

From millennials to retirees, …Illinois is losing its promise as a land of opportunity. Government debt and dysfunction contribute to a weak housing market and a stagnant jobs climate. State and local governments face enormous pension and other obligations. Taxes have risen sharply; many Illinois politicians say they must rise more. People are fleeing. Last year’s net loss: 33,703.

In an editorial for the Chicago Tribune, Kristen McQueary correctly worries about the trend.

It’s one thing to harbor natural skepticism toward government. It’s quite another to take the dramatic step of moving your family, your home, your livelihood to another state to escape it. But it’s happening. The naysayers and deniers blame the weather. They eye-roll the U-Haul rebellion. They downplay the dysfunction. Good riddance to those stingy taxpayers, they trumpet. But that is a shallow, ignorant and elitist viewpoint that dismisses the thoughtful and wrenching decisions thousands of once-devoted Illinoisans have made. For four years in a row, Illinois has lost population in alarming numbers. In 2017, Illinois lost a net 33,703 residents, the largest numerical population decline of any state. That’s the size of St. Charles or Woodridge or Galesburg. Wiped off the map. In one year. …Policy choices have consequences. …People are fleeing Illinois. And still, Democratic leaders in Chicago and Cook County, and their supporters, generally deny that high taxes, underfunded pensions, government debt and political dysfunction are the reasons for the exodus — or that it’s acute.

Newspapers in other states have noticed, as evinced by this editorial from the Las Vegas Review-Journal.

When the progressive political class preaches equality and prosperity, but bleeds productive citizens dry by treating them as little more than human ATMs, there should be little surprise when those same citizens take themselves (and their green) to greener pastures. Perhaps no state in the nation is seeing a bigger such exodus than Illinois. …On the flip side, all of the states surrounding Illinois saw their populations increase… Illinois is experiencing a self-inflicted storm of fiscal distress. …While state income taxes in Illinois don’t reach they level impose in states such as New York and California, that’s not for a lack of trying. The state raised its rate by 32 percent over the summer, and Democrats want to even more progressive tax rates to pay for all the goodies they’ve promised to Big Labor in order to grease their re-elections. …Illinois is a financial basket case — which is what you get when you combine political patronage with powerful public-sector unions that control leftist politicians. The state should be a case study for other jurisdictions on how not to conduct public policy. After all, who will pay the bills when the taxpayers flee?

Steve Chapman, in a column for Reason, expects more bad news for Illinois because of pressure for higher taxes.

With the biggest public pension obligations, the slowest personal income growth, and the biggest population loss of any state, it has consistently recorded achievements that are envied by none but educational to all. The state is in the midst of a debilitating fiscal and economic crisis. …Illinois has endured two income tax increases in the past seven years. In 2011, the flat rate on individual income jumped from 3 percent to 5 percent. In 2015, under the original terms, it fell to 3.75 percent—a “cut” that left the rate 25 percent above what it was in 2010. Then last year, over Gov. Bruce Rauner’s veto, the legislature raised the rate to 4.95 percent. None of these changes has ended the state’s economic drought, and it’s reasonable to assume they actually made it drier. …well-paid people can’t generally leave the country to find lower tax rates. They can leave one state for another, and they do. …A 2016 poll by the Paul Simon Public Policy Institute at Southern Illinois University found that nearly half of residents would like to leave the state—and that “taxes are the single biggest reason people want to leave.”

The Wall Street Journal opined on the state’s slow-motion suicide.

The only…restraint…on public union governance in Illinois…the state’s flat income tax. …Democrats in Springfield have filed three constitutional amendments to establish a graduated income tax… Democrats are looking for more revenue to finance ballooning pension costs, which consume about a quarter of state spending. …Connecticut and New Jersey provide cautionary examples. Democrats in both states have soaked their rich time and again, and the predictable result is that both states have fewer rich to soak. Economic growth slowed and revenues faltered. This vicious cycle is already playing out in Illinois amid increasing property, income and business taxes. Over the last four years, Illinois GDP has risen a mere 0.9% per year, half the national average and the slowest in the Great Lakes region. Between 2012 and 2016, Illinois lost $18.35 billion in adjusted gross income to other states. …Democrats claim a progressive income tax will spare the middle-class, but sooner or later they’ll be the targets too because there won’t be enough rich to finance the inexorable demands of public unions. …Once voters approve a progressive tax, Democrats can ratchet up rates as their union lords dictate.

While a bloated and over-compensated bureaucracy (especially unfunded promises for lavish retiree benefits) is the top fiscal drain, the state also loves squandering money in other ways.

Here are some excerpts from a piece in the Belleville News-Democrat.

Illinois is the dependency capital of the Midwest. No other state in the region has more of its population dependent on food stamps… So what’s driving the state’s dependency crisis? State bureaucrats using loopholes and gimmicks to keep more people dependent on welfare. According to the Illinois Department of Human Services, nearly 175,000 able-bodied childless adults are on the program. These are adults in their prime working years — between the ages of 18 and 49 — with no dependent children and no disabilities keeping them from meaningful employment. …the state has relied upon loopholes and gimmicks to trap more and more able-bodied adults in dependency. Federal law allows states to seek temporary waivers of the work requirement in areas with unemployment rates above 10 percent or with a demonstrated lack of job opportunities in the region. …the Illinois Department of Human Services…used old data and it gerrymandered the request in whatever way was necessary to keep more able-bodied adults on welfare. …State bureaucrats have gamed the system and as a result, thousands of able-bodied adults will remain trapped in dependency, with little hope of better lives.

Let’s close with some excerpts from a very depressing column in the Chicago Tribune by Diana Sroka Rickert.

…this is a state government that has been broken for decades. It is designed to reject improvement in every form, at every level. …The Thompson Center…is a near-perfect representation of state government. It is gross, rundown, and nobody cares. …there is a disturbing sense of entitlement among some state employees. …Underperformers aren’t fired; they’re simply transferred to different positions, shuffled elsewhere on the payroll or tucked away at state agencies. …this is a state government that is ranked last by almost every objective and measurable standard. A state government that fails every single one of its residents, day after day — and has failed its residents for decades. A state government that demands more and more money each year, to deliver increasingly less value.

Keep in mind, incidentally, that all this bad news will almost certainly become worse news thanks to last year’s tax reform. Restricting the state and local tax deduction means a much smaller implicit federal subsidy for high-tax states.

P.S. If you want good news on state tax policy, South Dakota may have the nation’s best system. And North Carolina arguably has taken the biggest step in the right direction. Kentucky, meanwhile, has just switched to a flat tax.

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Since it’s the last day of the year, let’s look back on 2017 and highlight the biggest victories and losses for liberty.

For last year’s column, we had an impressive list of overseas victories in 2016, including the United Kingdom’s Brexit from the European Union, the vote against basic income in Switzerland, the adoption of constitutional spending caps in Brazil, and even the abolition of the income tax in Antigua and Barbuda.

The only good policies I could find in the United States, by contrast, were food stamp reforms in Maine, Wisconsin, and Kansas.

This year has a depressingly small list of victories. Indeed, the only good thing I had on my initial list was the tax bill. So to make 2017 appear better, I’m turning that victory into three victories.

  • A lower corporate tax rate – Dropping the federal corporate tax rate from 35 percent to 21 percent will boost investment, wages, and competitiveness, while also pressuring other nations to drop their corporate rates in a virtuous cycle of tax competition. An unambiguous victory.
  • Limits on the deductibility of state and local taxes – It would have been preferable to totally abolish the deduction for state and local taxes, but a $10,000 cap will substantially curtail the federal tax subsidy for higher taxes by state and local government. The provision is only temporary, so it’s not an unambiguous win, but the whining and complaining from class-warfare politicians in New York and California is music to my ears.
  • No border-adjustment tax – Early in 2017, I was worried that tax reform was going to be tax deform. House Republicans may have had good intentions, but their proposed border-adjustment tax would have set the stage for a value-added tax. I like to think I played at least a small role in killing this bad idea.
  • Regulatory Rollback – The other bit of (modest) good news is that the Trump Administration has taken some steps to curtail and limit red tape. A journey of a thousand miles begins with a first step.

Now let’s look elsewhere in the world for a victory. Once again, there’s not much.

  • Macron’s election in France – As I scoured my archives for some good foreign news, the only thing I could find was that a socialist beat a socialist in the French presidential election. But since I have some vague hope that Emanuel Macron will cut red tape and reduce the fiscal burden in France, I’m going to list this as good news. Yes, I’m grading on a curve.

Now let’s look at the bad news.

Last year, my list included growing GOP support for a VAT, eroding support for open trade, and the leftward shift of the Democratic Party.

Here are five examples of policy defeats in 2017.

  • Illinois tax increase – If there was a contest for bad state fiscal policy, Illinois would be a strong contender. That was true even before 2017. And now that the state legislature rammed through a big tax increase, Illinois is trying even harder to be the nation’s most uncompetitive state.
  • Kansas tax clawback – The big-government wing of the Kansas Republican Party joined forces with Democrats to undo a significant portion of the Brownback tax cuts. Since this was really a fight over whether there would be spending restraint or business-as-usual in Kansas, this was a double defeat.
  • Botched Obamacare repeal – After winning numerous elections by promising to repeal Obamacare, Republicans finally got total control of Washington and then proceeded to produce a bill that repealed only portions. And even that effort flopped. This was a very sad confirmation of my Second Theorem of Government.
  • Failure to control spending – I pointed out early in the year that it would be easy to cut taxes, control spending, and balance the budget. And I did the same thing late in the year. Unfortunately, there is no desire in Washington to restrain the growth of Leviathan. Sooner or later, this is going to generate very bad economic and political developments.
  • Venezuela’s tyrannical regime is still standing – Since I had hoped the awful socialist government would collapse, the fact that nothing has changed in Venezuela counts as bad news. Actually, some things have changed. The economy is getting worse and worse.
  • The Export-Import Bank is still alive – With total GOP control of Washington, one would hope this egregious dispenser of corporate welfare would be gone. Sadly, the swamp is winning this battle.

Tomorrow, I’ll do a new version of my annual hopes-and-fears column.

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Here’s what I wrote last month about the fiscal situation in Illinois.

Illinois is a mess. Taxes and spending already are too high, and huge unfunded liabilities point to an even darker future. Simply stated, politicians and government employee unions have created an unholy alliance to extract as much money as possible from the state’s beleaguered private sector. That’s not a surprise. Indeed, it’s easily explained by the “stationary bandit” theory of government. But while the bandit of government may be stationary, the victims are not. At least not in a nation with 50 different states.

Looking at this grim situation, the state legislature decided it had to act.

Unfortunately, the politicians in Springfield decided that action meant stepping on the accelerator while driving in the wrong direction. Democrats in the state legislature (joined by some big-government Republicans, just like in Kansas) just overrode Governor Rauner’s veto and imposed a huge tax hike on a state that already has one of the nation’s highest tax burdens.

This will hasten the state’s collapse.

Here’s what I said earlier this week about the prospect of another tax hike in the state.

I specifically want to highlight something I said about halfway through the interview about the burden of government spending in Illinois compared to regional competitors.

Here’s a chart I prepared based on data culled from the Census Bureau. As you can see, per-capita outlays are higher in Illinois than in neighboring states. In some cases, thousands of dollars higher.

Given this data, I’d like to ask the people of Illinois the same question I asked an audience in Paris when comparing France and Switzerland. What exactly are you getting for all that money?

The answer is nothing. Just like the French governments spends far more than the Swiss government without delivering better services, the Illinois government spends far more than the Indiana government without delivering better services.

Instead, the money gets diverted to the pockets of the various interest groups. In the case of Illinois, it’s almost as if the state exists to enrich a cossetted class of state and local bureaucrats.

The Wall Street Journal’s editorial earlier this week made several key points.

In Illinois, Democrats spent the long weekend coaxing Republican legislators to join their suicide pact to raise taxes to plug a $6 billion deficit… And don’t forget the $130 billion unfunded pension liability—none of which will be solved by the $5 billion tax hike. …The state legislature is controlled by public unions that refuse to compromise. …Pensions will consume about a quarter of Illinois’s general fund this year. Nearly 40% of state education dollars go toward teacher pensions, and the state paid nearly as much into the State Universities Retirement System last year as it spent on higher education. Anemic revenue and economic growth can’t keep up with entitlement spending. The state’s GDP has ticked up by a mere 0.8% annually over the last four years compared to 2% nationwide and 1.4% in the Great Lakes region. Since 2010 more than 520,000 Illinois residents on net have fled to other states.

And Jonathan Williams of the American Legislative Exchange Council also opined on the mess in Illinois.

…the focus should be on fixing the state’s big-government policy prescriptions that are killing economic growth and opportunity. It should come as no surprise that businesses and citizens continue to leave the Land of Lincoln in droves. The credit rating agencies are right to question Illinois’ ability to pay its bills, as the tax base flees to other states. …When the rosy accounting assumptions are stripped away, Illinois has a dismal 23.77 percent funding ratio, $362.6 billion in total amount of unfunded liabilities. That staggering number represents an unfunded pension liability of $28,200 for every man, woman and child in Illinois. …one might assume the state government is not bringing in enough revenue and merely needs to raise taxes. This is simply false. According to Tax Foundation’s analysis, Illinois’ taxpayers pay the 5th highest combined state-local tax burden in America. …It should come as no surprise, then, that nearly 700,000 Illinois residents left from 2006-2015… Only New York and California experienced higher levels of domestic out-migration during the same period.

The bottom line is that this latest tax hike will cause more productive people to leave the state. Politicians in the state also will have an excuse to postpone much-needed reforms of the state pension system, which is the primary threat to long-run solvency. And government, which already is too big, will become an even bigger burden.

P.S. At some point, I need to write about Indiana, a state that quietly has amassed a very good track record of fiscal prudence. Especially since it’s about to benefit from an influx of tax refugees from its neighbor to the west.

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Illinois is a mess. Taxes and spending already are too high, and huge unfunded liabilities point to an even darker future.

Simply stated, politicians and government employee unions have created an unholy alliance to extract as much money as possible from the state’s beleaguered private sector.

That’s not a surprise. Indeed, it’s easily explained by the “stationary bandit” theory of government.

But while the bandit of government may be stationary, the victims are not. At least not in a nation with 50 different states. Indeed, Illinois Policy reports that a growing number of geese with golden eggs decided to fly away after a big tax hike in 2011.

Politicians enacted Illinois’ 2011 income-tax hike during a late-night legislative session in January 2011 and raised the state’s personal income-tax rate to 5 percent from 3 percent. This 67 percent income-tax hike lasted for four years, during which time Illinois experienced record wealth flight. …The short-term increase in tax revenue gained from higher tax rates is offset by the long-term loss of substantial portions of Illinois’ tax base. The average income of taxpayers leaving Illinois rose to $77,000 per year in 2014, according to new income migration data released by the IRS. Meanwhile, the average income of people entering Illinois was only $57,000. …During the four years of the full income-tax hike, prior to its partial sunset in 2015, Illinois lost $14 billion in annual adjusted gross income, or AGI, to other states, on net.

Illinois has always had an unfavorable ratio when comparing the incomes of immigrants and emigrants. But you can see from this chart that there was a radically unfavorable shift after the tax hike.

Here’s a table from the article showing the 10-worst states.

Illinois leads this list of losers by a comfortable margin. Connecticut, meanwhile, has a strong hold on second place (which shouldn’t be a surprise).

The IP report observes that the states benefiting from internal migration have much better fiscal policy. In particular, most of them are on the admirable list of states that don’t impose income taxes.

…the top five states with favorable income differentials were Florida, Wyoming, Nevada, South Carolina and Texas. Notably, 4 of 5 of these states have no income tax, and none of them have a death tax.

It’s worth noting that the high-tax approach is not producing good results.

Instead, as reported by Bloomberg, the Land of Lincoln is the land of red ink.

Illinois had its bond rating downgraded to one step above junk by Moody’s Investors Service and S&P Global Ratings, the lowest ranking on record for a U.S. state… Illinois’s underfunded pensions and the record backlog of bills…are equivalent to about 40 percent of its operating budget. …investors have demanded higher premiums for the risk of owning its debt. Moody’s called Illinois “an outlier among states” after suffering eight downgrades in as many years. …like other states, has no ability to resort to bankruptcy to escape from its debts. A downgrade to junk, though, would add further financial pressure by increasing its borrowing costs.

Amazing, in spite of this ongoing meltdown, the Democrats who control the state legislature are pushing hard to once again increase the income tax.

Heck, they want to increase all sorts of taxes. Including higher burdens on the financial industry.

Kristina Rasumussen, the President of Illinois Policy, warned in the Wall Street Journal that this was not a good recipe.

Proponents here call it the “privilege tax.” …The Illinois bill would put a 20% levy on fees earned by investment advisers. It passed the state Senate in a 32-24 vote Tuesday, and backers are hoping to get it through the House before the legislative session ends May 31. The new tax is pitched as a way to squeeze more revenue—as much as $1.7 billion a year—from hedge funds and private-equity firms… An earlier version of the Illinois proposal included a provision so that the 20% tax would take effect only if and when New York, New Jersey and Connecticut enacted similar measures. But the bill as written now would impose the tax regardless, and lawmakers will simply have to hope other states follow suit. Yet who says financiers can’t do their jobs just as well in Palm Beach, Fla.—or London, Zurich or Hong Kong? The progressives peddling this idea don’t understand that Chicago competes for these businesses not only with New York and Greenwich, Conn., but with anywhere that can offer cellphone service and an internet connection. …Railing against supposed “fat cats” might satisfy progressive groups, but lawmakers shouldn’t be in the business of hounding the people who help connect capital with new opportunities for growth. …Rather than focus on how to make everyone miserable together, policy makers should work to increase their states’ competitiveness. A start would be to rally against this proposed privilege tax and instead fix the spiraling pension costs and outdated labor rules that are dragging Illinois and other blue states down.

Let’s hope the governor continues to reject any and all tax increases.

If he does hold firm, he’ll have allies.

Including the Chicago Tribune, which recently editorialized about the state’s dire position

Illinois legislators fumble repeated attempts to send a balanced budget to Gov. Bruce Rauner; while the stack of Illinois’ unpaid bills climbs by the minute; while our leaders prioritize politics over policy… Employers and other taxpayers are hopping over Illinois’ borders with alarming regularity. …What an embarrassment. What a dereliction of duty. …Illinois, boasting the lowest credit rating and the highest population loss of any state in the country, has doubled down. State government is in a full-blown crisis. Again. Since January, Democrats have discussed plans to raise income taxes and borrow money to pay down bills. They approved bills that would make Illinois a less attractive place to do business; under one proposal, Illinois would have the highest minimum wage of all its neighboring states.

This is some very sensible analysis from a newspaper that endorsed Obama in both 2008 and 2012.

Even more important, the state’s taxpayers are mostly on the correct side.

Illinoisans feel the strain of the state’s two-year budget impasse, but they are emphatic that tax hikes should not be part of any budget deal. These are the findings of a new poll of likely Illinois voters… Only 31 percent of survey respondents support raising the state income tax to end the budget impasse. An increase in the state sales tax is even more unpopular, with 76 percent of survey respondents opposed. Another key takeaway from the poll: A plurality (49 percent) of respondents who are directly affected by the state budget impasse prefer a cuts-only, no-tax-hike budget. …Survey respondents were also asked what they think of political candidates who support raising taxes to end the budget impasse. The poll found that likely Illinois voters will be unforgiving of candidates for governor or the General Assembly who raise the state income tax or sales tax.

I suspect taxpayers realize that higher taxes will simply lead to more spending.

Indeed, a leftist in the state inadvertently admitted that the purpose of tax hikes is to enable more spending.

If there is to be any hope for the future in Illinois, Governor Rauner needs to hold firm. So long as Republicans in the state legislature hold firm, he can use his veto power to stop any tax hikes.

Or he can be Charlie Brown.

P.S. Illinois is invariably near the bottom in comparisons of state fiscal policy. The one saving grace is that the state has a flat tax. If the statists ever succeed in replacing that system with a so-called progressive tax, it will just be a matter of time before the state passes New York and California in the real race to the bottom.

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Once of the reasons that tax increases in Washington are such a bad idea (and one of the reasons why a value-added tax is an especially bad idea) is that the prospect of additional tax revenue kills any possibility of genuine entitlement reform. Simply stated, politicians won’t do the heavy lifting of fixing those programs if they think can use a tax hike to prop up the current system for a few more years.

However, if we don’t fix the entitlements, the United States faces a very grim fiscal future regardless of new revenue because the burden of government spending will be expanding faster than the growth of the private economy.

Indeed, tax hikes presumably will accelerate the problems by weakening economic performance, creating an even bigger gap between the growth of government spending and the growth of productive output. Sort of a double violation of my Golden Rule.

Well, the same thing is happening in Illinois.

That state is a fiscal disaster. Taxes already are high, government spending already is excessive, and promises of lavish future benefits for government bureaucrats have created a mountain of unfunded liabilities. To make matters worse, there’s a never-ending trickle of taxpayers fleeing to other states, thus making the long-run outlook even worse.

A column in today’s Wall Street Journal discusses this unfolding disaster.

…what about the state’s fiscal apocalypse, which is not only happening right now but has plunged Illinois into a bona fide financial disaster? …the state has amassed $11 billion in unpaid bills—predicted to climb to more than $27 billion by the end of 2019. Illinois is facing the worst pension crisis of any U.S. state, with unfunded obligations totaling $130 billion, according to the state’s Commission on Government Forecasting and Accountability. That amounts to about $10,000 in debt for each resident. …Illinois also had the lowest credit rating among the 50 states as of October, when Moody’s Investors Service downgraded it again… Given all this, it’s no surprise that people are leaving. In 2016 Illinois lost more residents than any other state—for the third consecutive year. A total of 37,508 people fled, leaving the state’s population at its lowest level in nearly a decade.

By the way, the net payers of tax are the ones leaving, not the net consumers of tax. And every time one of the geese with golden eggs decides to fly away, Illinois falls deeper into a hole.

I discussed this phenomenon in a column for The Hill.

…there are some very uncompetitive, high-tax states, such as Illinois, that are in deep trouble due to internal migration.Most people have focused on the overall population loss of 37,508 in Illinois, but the number that should worry state politicians is, on net, a staggering 114,144 people left for other states. Only New York (another high-tax state with a grim future) lost more people to internal migration.Of course, what really matters, at least from a fiscal perspective, is the type of person who leaves. Data from the internal revenue service shows that states like Illinois are losing people with above-average incomes. In other words, the net taxpayers are escaping.

And don’t forget that Illinois is increasingly uncompetitive compared to neighboring states.

Here’s a blurb from a Wall Street Journal editorial in January,

Nearby Kentucky passed a right-to-work law last week and Missouri is expected to take up similar legislation in coming weeks. …this would leave Illinois, a non-right-to-work state, as an island with undesirable labor laws surrounded by states including Michigan, Indiana and Wisconsin that provide more worker choice and business flexibility.

I have some theoretical problems with right-to-work laws, but the WSJ is correct that private employers tend to avoid states where unions wield a lot of power.

Also, we can’t forget that the main city in Illinois has its own set of problems.

As discussed in an article for the American Thinker, Chicago adds crime and corruption to the mix.

Chicago has become the icon of bloody violence on its streets, but corruption also is part of its misery… Chicago’s city government is known for much more than just its one-sidedness.  From Mayor Richard J. Daley’s well known rackets of yesteryear to former U.S House representative Jesse Jackson, Jr. (who just last year completed his prison sentence after having pleaded guilty to multiple federal charges including fraud, conspiracy, wire fraud, criminal forfeiture, and more), the list of Democrats committing and getting caught committing fraud, taking bribes, running scams, and other malfeasance while in office is very long. …As reported by Gazette.com, “according to Illinois corruption researchers Dick Simpson and Thomas Gradel, more than 30 Chicago aldermen have been convicted of crimes since 1973, most of them on bribery and extortion charges. “More than 1,000 public officials and businessmen in Illinois have been convicted of public corruption since 1970, including imprisoned former Gov. Rod Blagojevich. But corruption among politicians on Chicago’s premier lawmaking body has been ‘particularly persistent’, the researchers wrote in an anti-corruption report.”

Gee, what a surprise. Politicians create big government in part so they have lots of goodies to distribute, and they then use those goodies to extort money from people.

Hmmm…, where have I seen that message before?

But let’s not get distracted. We’ve now established that Illinois is a giant mess. We also know that the state can only be saved if there is both short-run spending restraint and long-run spending restraint (to deal with unaffordable benefits promised to the state’s massive bureaucracy). Though we also know that the chances of getting those necessary reforms will evaporate if tax hikes are an option.

So is anybody surprised that the state’s supposedly anti-tax governor is getting seduced/pressured into throwing taxpayers under the bus?

The Wall Street Journal opines on this development.

Illinois Governor Bruce Rauner has been trying to pull the Land of Lincoln out of economic decline…, and it’s a losing battle. After two years without a state budget, Mr. Rauner is now bending as Democrats promise to hold the budget hostage if he doesn’t sign a tax increase. In his State of the State address last week, Mr. Rauner said he was open to “consider revenue increases” in conjunction with “job-creating changes” in pursuit of a budget deal. He endorsed negotiations underway with state lawmakers to craft a “grand bargain”…the speech was greeted with derision by the state’s Springfield mafia that assumes it now has the Governor where it wants him. …The deal now being crafted in the state Senate would increase the state’s flat income-tax rate to somewhere around 5% from the current 3.75%. …Democrats are still peddling that they can tax their way out of Illinois’s economic decline, while taxpayers are picking up and heading to neighboring states.

Incidentally, there was a temporary hike in the tax to 5 percent a few years ago. How did that work out?

…the years of an elevated income tax produced one of the country’s weakest state economic recoveries, with bond-rating declines in Chicago and staggering deficits statewide. …Senate President John Cullerton said the point of the temporary hike was to pay pensions, “pay off our debt [and] to have enough money to pay the interest on that debt.” But the roughly $31 billion it generated made hardly a dent. Since 2011 the unfunded pension liability in Illinois has grown by $47 billion, even as the tax hike was mostly spent on pensions.

Here’s the bottom line. Governor Rauner made a huge mistake by stating that he would “consider revenue increases.”

Illinois, after all, is not suffering from inadequate tax collections.

Moreover, now that Rauner has waved the white flag, there’s a near-zero chance that he’ll be able to get something in exchange such as a Colorado-style spending cap or much-need constitutional reform to control pension expenditures.

Instead, higher revenues will trigger even more wasteful outlays (as leftists in the state sometimes accidentally admit).

I guess there’s still a chance he’ll do what’s best for the state and reject tax hikes, but as of now it looks like Rauner will be the next winner of the Charlie Brown Award.

Oh, and he’ll also jeopardize his own political career. Which helps to explain why the GOP is known as the “stupid party.”

P.S. I don’t think it beats my examples from Greece and Japan, but Illinois at least can compete in the dumbest-regulation contest.

P.P.S. Illinois is a terrible state for gun rights, and it even persecutes people who use guns to fight crime. The only silver lining to that dark cloud is this amusing example of left-wing social science.

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There’s a somewhat famous quote from Adam Smith (“there is a great deal of ruin in a nation“) about the ability of a country to survive and withstand lots of bad public policy. I’ve tried to get across the same point by explaining that you don’t need perfect policy, or even good policy. A nation can enjoy a bit of growth so long as policy is merely adequate. Just give the private sector some “breathing room,” I’ve argued.

Growth will be weaker with bad policy, of course, but if a nation already is relatively rich, then perhaps voters don’t really care.

But there’s a catch. If you add demographic change to the equation, then bad policy can be a recipe for crisis rather than slow growth. This is one of the reasons why I’m worried about the long-run outlook for Europe, with particular concern about Eastern Europe (by the way, we also have to worry in America).

Welfare State Wagon CartoonsSimply stated, you have to pay attention to the ratio of producers to consumers. And that’s why demographics is important. Falling birthrates and increasing lifespans will wreak havoc with Europe’s tax-and-transfer welfare states.

But there’s another form of demographic change that also can have a big impact. Migration patterns can alter the economic vitality of a jurisdiction. I’ve written about the exodus of French entrepreneurs who move to other countries with better tax systems, and the same thing happens with migration between American states.

And you probably won’t be surprised to learn that Illinois is usually on the losing end.

The Wall Street Journal opines on the state’s grim outlook.

…taxpayers are fleeing the Land of Lincoln in record numbers. According to the Census Bureau, Illinois now leads the nation for the steepest population decline. Between July 2015 and July 2016, Illinois lost some 114,000 people in net migration to other states, with total population decline of 37,508 (including births and deaths). For the third year in a row it was the only state to have lost population among the nine in its Great Lakes and Mid-America region.

But what’s really important, the WSJ explains, is that Illinois is losing people who are net producers and contributors.

…the average person moving out of the state earns some $20,000 more than the average person moving in. According to IRS data for tax year 2014 (filed in 2015), the average income of the taxpayer leaving Illinois was $76,824 while the average income of the new arrival was $56,689. That gap is widening and the differential can be traced to policy decisions as the state staggers under pension debt and an entrenched Democratic-public union machine in Springfield. In an effort to cover growing debt, in January 2011 state lawmakers raised the personal income tax rate to 5% from 3% and the corporate income tax to 9.5% from 7.3%. …The exodus accelerated to 73,500 from July 2011 to July 2012, 67,300 in 2012-2013, 95,000 in 2013-2014, 105,000 in 2014-2015 and 114,000 this year.

The class-warfare tax hike in 2011 was a terrible signal to investors and entrepreneurs.

Illinois already was losing both taxpayers and taxable income during the first decade of the century and the tax increase accelerated the process.

And keep in mind that the state also has a gigantic unfunded liability because of absurd promises of lavish pensions and fringe benefits for state and local government employees.

It’s almost as if the politicians in Springfield want to make the state unattractive.

Though the situation isn’t totally hopeless. Voters elected an anti-tax governor in 2014 and there’s a possibility that the destructive tax increase of 2011 won’t be renewed.

The Wall Street Journal makes a very wise recommendation to the Governor.

Democrats are trying to shake Mr. Rauner down for a repeat. He needs to hold firm to stop the state’s population exodus.

Needless to say, it would be a good idea to let the tax hike expire. That being said, that simply gets the state back to where it was in 2010, which wasn’t exactly a strong position.

The bottom line is that Illinois may have passed the tipping point and entered a death spiral. Sort of akin to being the Greece of America.

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I shared a very amusing column last year about “a modest proposal” to reduce income inequality.

Written tongue-in-cheek by David Azerrad of the Heritage Foundation, the premise was that society could be made more “fair” by exiling – or perhaps even selling to the highest bidder – America’s richest people.

David’s piece cleverly made the point that such a policy would dramatically lower inequality, but would do nothing to boost the living standards of poor people. Indeed, when you consider all the damage that would be caused if America lost its top entrepreneurs, investors, and business owners, lower-income people obviously would suffer immense hardship as the economy shrank.

Unfortunately, there’s no evidence that Hillary Clinton read his article. Or, if she did, she obviously didn’t learn anything. Her agenda, which is echoed by almost all leftists, is endlessly higher taxes to fight the supposed scourge of inequality.

I’ve always thought inequality was the wrong target. If politicians really cared about the less fortunate, they would instead focus on growth in order the reduce poverty.

But our friends on the left apparently believe (or, if they’re familiar with historical data, they pretend to believe) that the economy is a fixed pie. So if someone in the top-1 percent, top-5 percent, top-10 percent, or top-20 percent gets more money, then the rest of us must have less money.

Heck, they don’t even understand the data that they like to cite. Writing for National Review, Thomas Sowell debunks many of the left’s most-cherished talking points about inequality.

When we hear about how much more income the top 20 percent of households make, compared with the bottom 20 percent of households, one key fact is usually left out. There are millions more people in the top 20 percent of households than in the bottom 20 percent of households. …In 2002, there were 40 million people in the bottom 20 percent of households and 69 million people in the top 20 percent. A little over half of the households in the bottom 20 percent have nobody working. You don’t usually get a lot of income for doing nothing. In 2010, there were more people working full-time in the top 5 percent of households than in the bottom 20 percent. …Household income statistics can be very misleading in other ways. …The number of people per American household has declined over the years. When you compare household incomes from a year when there were 6 people per household with a later year when there were 4 people per household, you are comparing apples and oranges. Even if income per person increased 25 percent between those two years, average household income statistics will nevertheless show a decline.  …household income statistics can show an economic decline, even when per capita income has risen.

My Cato Institute colleague, Mike Tanner, has a must-read comprehensive study on inequality that was just released today. Here are some of the parts I found especially enlightening, starting with a very important passage from his introduction.

…contrary to stereotypes, the wealthy tend to earn rather than inherit their wealth… Most rich people got that way by providing us with goods and services that improve our lives. Income mobility may be smaller than we would like, but people continue to move up and down the income ladder. Few fortunes survive for multiple generations, while the poor are still able to rise out of poverty. More important, there is little relationship between inequality and poverty. The fact that some people become wealthy does not mean that others will become poor.

Mike then spends a few pages debunking Thomas Piketty (granted, an easy target, but still a necessary task) and pointing out that some folks overstate inequality.

But more importantly, he then points out that there is still considerable income mobility in the United States. Rich people often don’t stay rich and poor people frequently don’t stay poor.

…wealth often dissipates across generations; research shows that the wealth accumulated by some intrepid entrepreneur or businessperson rarely survives long. In many cases, as much as 70 percent has evaporated by the end of the second generation and as much as 90 percent by the end of the third. Even over the shorter term, the composition of the top 1 percent often changes dramatically. If history is any guide, roughly 56 percent of those in the top income quintile can expect to drop out of it within 20 years. …of those on the first edition of the Forbes 400 in 1982, only 34 remain on the 2014 list, and only 24 have appeared on every list. …At the same time, it remains possible for the poor to become rich, or, if not rich, at least not poor. Studies show that roughly half of those who begin in the bottom quintile move up to a higher quintile within 10 years. …And their children can expect to rise even further. One out of every five children born to parents in the bottom income quintile will reach one of the top two quintiles in adulthood.

Here’s his graph with the relevant data.

Mike also debunks that notion that poor people are poor because rich people are rich.

…it is important to note that poverty and inequality are not the same thing. Indeed, if we were to double everyone’s income tomorrow, we would do much to reduce poverty, but the gap between rich and poor would grow larger. Would this be a bad thing? …The idea that gains by one person necessarily mean losses by another reflects a zero-sum view of the economy that is simply untethered to history or economics. The economy is not fixed in size, with the only question being one of distribution. Rather, the entire pie can grow, with more resources available to all.

His study is filled with all sorts of data, but this graph may be the most important tidbit.

It shows that the poverty rate has remained relatively constant, oscillating around 14 percent, during the period when the so-called top-1 percent were generating large amounts of additional income.

Mike then spends some time agreeing that inequality can be bad if it is the result of subsidies, bailouts, protectionism, and handouts.

Amen. Rich people deserve their money if they earn it in the marketplace. But if they get rich via TARP bailouts, Ex-Im Bank subsidies, protectionist barriers, green-energy boondoggles, or some other form of cronyism, that’s reprehensible and unjustified.

Most important of all, he closes by explaining that inequality isn’t what’s important. Policy should be focused on reducing poverty, which means more economic growth.

There are…two ways to reduce inequality. One can attempt to bring the bottom up by reducing poverty, or one can bring the top down by, in effect, punishing the rich. Traditionally, we have tried to reduce inequality by taxing the rich and redistributing that money to the poor. …Despite the United States spending roughly a trillion dollars each year on antipoverty programs at all levels of government, by the official poverty measure we have done little to reduce poverty. …we are unlikely to see significant reductions in poverty without strong economic growth. Punishing the segment of society that most contributes to such growth therefore seems a poor policy for serious poverty reduction. …While inequality per se may not be a problem, poverty is. …policies designed to reduce inequality by imposing new burdens on the wealthy may perversely harm the poor by slowing economic growth and reducing job opportunities.

Exactly. The notion that we can help the poor by making America more like a high-tax European-style welfare state is laughable.

By every possible standard, the United States is out-pacing Europe in terms of jobs and growth. And what’s really remarkable is that this is happening even though Obamanomics has given us the weakest recovery since the Great Depression. Imagine how big the gap would be if we has the kind of market-oriented policies that dominated the Reagan and Clinton years!

Let’s close with a very amusing bit of data about inequality from a report in the New York Times.

The author looked at income changes in each state between 1990 and 2014 at all levels of income distribution.

By looking at the state level, we’re delineating the rich and poor within that state. Which is to say that the 90th percentile of personal income in Arkansas will not be the same as the 90th percentile of personal income in New York. This calculation helps us avoid making unfair comparisons of income between places with different costs of living.

Since I wrote just two days ago about the importance of adjusting state income data to reflect the cost of living, I obviously view this as a useful exercise.

But here’s the part that grabbed my attention. As I was reviewing the various charts for all the states, I noticed that inequality has expanded dramatically in the most infamous left-wing states. And usually not simply because rich people got richer faster than poor people got richer. In New York, Illinois, and California, rich people were the only winners.

Yet if you look at Kansas (which is the favorite whipping boy of the left because of Gov. Brownback’s big tax cuts) or the stereotypical red state of Texas, you’ll notice the lower-income and middle-income people did much better.

I guess we can use this data as additional evidence of how statist policies cause inequality.

Best of all, it was in the New York Times, so our leftist friends will have a hard time reflexively dismissing the data. It’s always good when the other side scores an “own goal.”

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I’ve done a couple of posts comparing Reaganomics and Obamanomics, mostly based on data from the Minneapolis Federal Reserve on employment and economic output.

I even did a TV interview on the subject, which generated some comments on my taste in clothing, and also cited a Richard Rahn column that got Paul Krugman and Ezra Klein upset.

Some of the best evidence about high tax rates vs. low tax rates comes from inside America. Art Laffer (yes, that Art Laffer) and Steve Moore have a great column in today’s Wall Street Journal. It’s sort of Reaganomics vs. Obamanomics, looking at evidence from the states.

Barack Obama is asking Americans to gamble that the U.S. economy can be taxed into prosperity. …Mr. Obama needs a refresher course on the 1920s, 1960s, 1980s and even the 1990s, when government spending and taxes fell and employment and incomes grew rapidly. But if the president wants to see fresher evidence of how taxes matter, he can look to what’s happening in the 50 states. In our new report “Rich States, Poor States,” prepared for the American Legislative Exchange Council, we compare the economic performance of states with no income tax to that of states with high rates. It’s like comparing Hong Kong with Greece… Every year for the past 40, the states without income taxes had faster output growth (measured on a decadal basis) than the states with the highest income taxes. In 1980, for example, there were 10 zero-income-tax states. Over the decade leading up to 1980, those states grew 32.3 percentage points faster than the 10 states with the highest tax rates. Job growth was also much higher in the zero-tax states. The states with the nine highest income tax rates had no net job growth at all, and seven of those nine managed to lose jobs.

Tax rates also lead people to “vote with their feet.” Laffer and Moore look at migration patterns.

Over the past decade, states without an income tax have seen 58% higher population growth than the national average, and more than double the growth of states with the highest income tax rates. …Illinois, Oregon and California are state practitioners of Obamanomics. All have passed soak-the-rich laws like the Buffett Rule (plus economically harmful regulations, like California’s cap-and-trade scheme), and all face big deficits because their economies continue to sink. Illinois has lost one resident every 10 minutes since hiking tax rates in January. California has 10.9% unemployment, having lost 4.8% of its jobs over the past decade. …Every time California, Illinois or New York raises taxes on millionaires, Florida, Texas and Tennessee see an influx of rich people who buy homes, start businesses and shop in the local economy.

Competition among the states is leading some states to make further improvements. Some are even trying to get rid of their income taxes.

Republican governors in Florida, Georgia, Idaho, North Dakota, South Carolina, Ohio, Tennessee, Wisconsin and even Michigan and New Jersey are cutting taxes to lure new businesses and jobs. Asked why he wants to reduce the cost of doing business in Wisconsin, Gov. Scott Walker replies: “I’ve never seen a store get more customers by raising its prices, but I’ve seen customers knock down the doors when they cut prices.” Georgia, Kansas, Missouri and Oklahoma are now racing to become America’s 10th state without an income tax.

I like the quote from Governor Walker. He seems to know what he’s talking about, so it will be interesting to see whether he survives the upcoming recall election. I guess it depends whether voters understand that big government and high tax rates is a recipe for continued decline.

Some states, such as Illinois and California, are filled with voters who refuse to recognize reality. Think of them as the Greece and Spain of America, perhaps because the number of tax-consumers is greater than the number of tax-producers.

And even though parasites should understand it doesn’t make sense to kill their host animals, this cartoon illustrates how the welfare states lures a growing number of people to ride in the wagon. And this cartoon shows the consequences of too many moochers and not enough producers.

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Illinois is a hopeless state, filled with greedy bureaucrats and senseless politicians. Not surprisingly, it’s also a state that prosecutes people who try to protect themselves from criminals.

Here’s part of a story from the Chicago Tribune, featuring an elderly army veteran who was arrested for shooting a burglar.

An 80-year-old tavern owner in Englewood believes it’s “unjust” that he is facing charges after shooting a burglar, but believes he will prevail in court. “It’s wrong,” Homer “Tank” Wright said as he walked into his bar after being released from jail this afternoon. “Unjust that I can’t protect me.” Awakened by his 75-year-old wife, Wright confronted a 19-year-old burglar who had broken through some plywood over a bathroom window in hopes of stealing liquor, according to police. Wright grabbed his 38.caliber pistol, loaded with four rounds, and shot the intruder in the leg. The suspect was arrested — but so was Wright. …Wright said his bar has been broken into four to six times, and he and his wife had started staying overnight at the property to protect it. “This is our living,” he said, adding that he has had triple bypass surgery. “I’m going to be here. I’m not leaving. This is where I’m planning to stay.”

Fortunately, this isn’t like the Trayvon Martin case since both Mr. Wright and the thug are black. So without the distraction of race, we can focus on the genuine injustice of the government making it difficult for innocent people to fight back against crime.

Mr. Wright’s family understands the real issue.

Several of Wright’s relatives cheered in the gallery after the judge ordered him released, drawing a rebuke from deputies. After the hearing, Wright’s grandson Courtney Cook said his grandfather has the right to protect his home and the tavern he has run for 40 years. “You have to look at what’s right and what’s wrong in that situation,” he said. “He’s supposed to protect his home and his family. I mean, you know, is he supposed to be the victim? I mean, you know, just let it keep happening? If it’s going to keep happening, then where’s the law? What good is the law?”

Mr. Wright’s neighbors also have the right attitude.

On his South Side block, Wright is known as a hard-working neighbor who runs a bar that has become a neighborhood institution. Known as “Tank,” Wright has operated the bar next to his home for more than 40 years, neighbors said. …Anita Dominique, head of the block club in the neighborhood, said she has known Wright for more than 30 years. “He is a pillar of our community,” she said. “What does it say to me and other senior citizens that we will be arrested if we defend ourselves?” Neighbors held a news conference this morning to call on prosecutors to drop the charges. “If a man can’t defend himself from harm, what can he do?” asked Darryl Smith. “If he hadn’t defended himself, we would be here for a different reason — because an intruder came in and killed him. “We’re outraged as a community and we’re calling for the state’s attorney’s office to drop the charges,” he added. “This man has done nothing wrong.”

By the way, I’m mocking Illinois, but New York City is equally foolish about penalizing victims.

And you will be flabbergasted by this example of anti-gun zealotry in England.

It’s ironic, in an outrageous way, that the government punishes people for protecting their lives and property, when such actions are only necessary because the government is failing to fulfill one of its few legitimate responsibilities.

This is why I recommend you share this Cato Institute study showing how private guns are frequently used to thwart criminals.

P.S. I suspect these two anecdotes/stories are urban legends, but this interview with a general and this letter-to-the-editor are very much worth reading…and sharing.

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President Obama’s two biggest “achievements” since taking office are the so-called stimulus and government-run healthcare.

But neither one of those policies are popular, so the President largely ignored them during his state-of-the-union address and instead focused on using the tax code to promote “fairness.”

But fairness doesn’t mean treating everyone equally by adopting a flat tax. Instead, it means a class-warfare policy of higher tax rates.

The President’s home state of Illinois is a good test case of this approach. The politicians rammed through a big tax increase early last year, supposedly to stabilize state finances.

Unfortunately, Obamanomics isn’t working very well in Illinois. The state just got downgraded by Moody’s and ranks below even California.

The most damning evidence, though, is what’s happened to the job market. Unemployment is still far too high across the nation, but the vast majority of states are seeing at least modest improvement.

But a tiny handful of states, led by Illinois, are moving in the wrong direction. Here’s a very powerful chart produced by the Illinois Policy Institute. The tax hike is about one-year old, and we’re already seeing strong evidence that jobs are fleeing the state.

Now close your eyes and envision a different map. Instead of American states, imagine a map of the world. And think what it will look like if Obama succeeds in imposing all the tax increases he had endorsed.

I suppose it won’t look as bad as this map because there are plenty of other nations engaging in suicidal tax policy. But it doesn’t take a vivid imagination to understand that Obama’s class-warfare approach would drive jobs and investment to the nations with better tax policies.

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Two days ago, I explained that tax increases are bad policy.

More specifically, I warned that giving more money to government exacerbates fiscal problems because politicians respond to the expectation of more revenue by spending more than otherwise would be the case. And since they usually over-estimate how much revenue a tax hike will generate, that creates an even bigger fiscal mess.

Not surprisingly, I cited Europe to bolster my case. The tax burden has increased enormously in Europe over the past several decades, but that obviously hasn’t prevented a fiscal crisis in nations such as Greece and Portugal. And tax hikes haven’t precluded deteriorating conditions in countries such as Belgium and France.

But I also cited Illinois, which just got downgraded by Moody’s – even though state politicians just imposed a record tax hike.

This caused some angst for a lefty blogger in Illinois, who wrote that, “Operational spending is down since the Illinois tax hike.”

I gather he thinks this is some sort of gotcha moment, but two sentences later he admits that, “If Illinois hadn’t increased its taxes, it would’ve had to cut $7 billion more from spending to balance its budget.”

In other words, his post confirms my point about higher taxes translating into higher spending. He openly admits that the tax hike was a substitute for spending restraint.

What makes his concession so remarkable is that my argument wasn’t even based on one-year fiscal decisions. I”m much more concerned with trend lines, and you can see from the chart that Illinois politicians have been promiscuously profligate in recent years.

Indeed, I developed “Mitchell’s Golden Rule” to underscore the importance of restraining the burden of government so that, over time, it grows slower than the private economy. That obviously hasn’t been happening in Illinois in recent decades – and it’s not likely to happen in future decades if politicians figure out ways of grabbing more revenue.

Speaking of revenue, my accidental friend from Illinois also tries to debunk my point about the Laffer Curve by writing that, “The Commission on Government Forecasting and Accountability has repeatedly said this year that revenues from the tax increase are coming in as the ‘politicians’ expected.”

Well, I don’t know about you, but this is not exactly a rigorous rebuttal. He doesn’t provide a revenue forecast from the pre-tax-hike era or a more recent forecast from the post-tax-hike era, so we can’t make any comparisons. Instead, we’re supposed to blindly accept vague assurances from some Commission.

This doesn’t mean that forecasts don’t exist or that the bureaucrats were wrong about their short-run projections. But that’s not the main issue. The key question is what will happen to revenue over a period of years, particularly once entrepreneurs, investors, and businesses have time to adjust their behavior in response to the more onerous tax regime.

The changes can be enormous, as demonstrated in this post showing how rich people paid five times as much federal income tax after Reagan cut the top tax rate from 70 percent to 28 percent.

It will take a few years before we have a decent idea about the consequences of the Illinois tax hike. But since Illinois is copying European-style fiscal policy, don’t be too surprised if the result is European-style economic malaise.

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I don’t blame the Democrats for wanting to seduce Republicans into a tax-increase trap. Indeed, I completely understand why some Democrats said their top political goal was getting the GOP to surrender the no-tax-hike position.

I’m mystified, though, why some Republicans are willing to walk into such a trap. If you were playing chess against someone, and that person kept pleading with you to make a certain move, wouldn’t you be a tad bit suspicious that they weren’t trying to help you win?

When I talk to the Republicans who are open to tax hikes, they sometimes admit that their party will suffer at the polls, but they say it’s the right thing to do because of red ink.

I suppose that’s a noble sentiment, though I find that most GOPers who are open to tax hikes also tend to be big spenders, so I question their sincerity (with Senator Coburn being an obvious exception).

But even if we assume that all of them are genuinely motivated by a desire to control deficits and debt, shouldn’t they be asked to provide some evidence that higher taxes are an effective way of fixing the fiscal policy mess?

I’m not trying to score debating points. This is a serious question.

European nations, for instance, have been raising taxes for decades, almost always saying that higher taxes were necessary to balance budgets and control red ink. Yet that obviously hasn’t worked. Europe’s now in the middle of a fiscal crisis.

So why do some people think we should mimic the French and the Greeks?

But we don’t need to look overseas for examples. Look at what’s happened in Illinois, where politicians recently imposed a giant tax hike.

The Wall Street Journal opined this morning on the results. Here are the key passages.

Run up spending and debt, raise taxes in the naming of balancing the budget, but then watch as deficits rise and your credit-rating falls anyway. That’s been the sad pattern in Europe, and now it’s hitting that mecca of tax-and-spend government known as Illinois. …Moody’s downgraded Illinois state debt to A2 from A1, the lowest among the 50 states. That’s worse even than California. …This wasn’t supposed to happen. Only a year ago, Governor Pat Quinn and his fellow Democrats raised individual income taxes by 67% and the corporate tax rate by 46%. They did it to raise $7 billion in revenue, as the Governor put it, to “get Illinois back on fiscal sound footing” and improve the state’s credit rating. So much for that. …And—no surprise—in part because the tax increases have caused companies to leave Illinois, the state budget office confesses that as of this month the state still has $6.8 billion in unpaid bills and unaddressed obligations.

In other words, higher taxes led to fiscal deterioration in Illinois, just as tax increases in Europe have been followed by bad outcomes.

Whenever any politician argues in favor of a higher tax burden, just keep these two points in mind.

1. Higher taxes encourage more government spending.

2. Higher taxes don’t raise as much money as politicians claim.

The combination of these two factors explains why higher taxes make things worse rather than better. And they explain why Europe is in trouble and why Illinois is in trouble.

The relevant issue is whether the crowd in Washington should copy those failed examples. As this video explains, higher taxes are not the solution.

Heck, I’ve already explained that more than 100 percent of America’s long-fun fiscal challenge is government spending. So why reward politicians for overspending by letting them confiscate more of our income?

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When I read the story from England about needing photo ID to buy teaspoons, I thought British bureaucrats built an insurmountable lead in the U.S. vs. U.K. contest for stupidest government action.

But I should have had more faith in the hare-brained politicians of Illinois. When they’re not busy driving businesses from the state with punitive taxes or lining the pockets of the political elite with graft and corruption, these geniuses display impressive levels of brainless behavior.

In this case, they decided to require identification – and a log – for the purchase of drain cleaner and other caustic products.

Why? Well, because somebody could use them in the commission of a crime. Sort of like the killer teaspoons from England.

Here are some excerpts from a local media report.

A new state law requires those who buy drain cleaners and other caustic substances to provide photo identification and sign a log. It’s getting a rough reception from customers and merchants alike although perhaps none more than a cashier at Schroeder’s True Value Hardware in Lombard. “They’re not very happy about it at all,” said Don Schroeder, one of the store’s owners. …The law, which took effect Sunday, requires those who seek to buy caustic or noxious substances, except for batteries, to provide government-issued photo identification that shows their name and date of birth. The cashier then must log the name and address, the date and time of the purchase, the type of product, the brand and even the net weight. …Jewel-Osco has removed the few items it carried from its shelves, but Schroeder said he does not have that option as a hardware store. He said he does not believe that the precautions written into the bill will prevent such crimes from occurring. “How are they going to find out, by asking every customer, what kid might have done that? It’s not going to solve any problems,” Schroeder said. “It’s not going to cure anything.”

The legislation is disliked by both businesses and consumers, so one might be tempted to think it will be repealed.

But that’s a silly assumption. You have to remember that the bureaucrats in charge of enforcing the law doubtlessly like having another excuse for bigger budgets.

And since Illinois is a state where bureaucrats engage in public protests for more money, they probably have more political influence than the poor saps who actually pay the bills.

One more nail in the coffin of a state that is vying with California to become the Greece of America.

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I’ve already commented on some of the sleazy behavior that infects Chicago politics.

Now we have a jaw-dropping example of what’s wrong with the state of Illinois, as explained by Bill McGurn of the Wall Street Journal.

Soon the Illinois state legislature will meet in special session to consider the Chicago machine’s latest favor: legislation designed to deliver tax relief to three of the state’s largest companies. These tax breaks for the lucky few come just 10 months after the Illinois legislature approved what has been described as the largest tax increase in the state’s history. …In so doing, Chicago is giving America a window into the logic of crony capitalism: Raise taxes on everyone—and then cut side deals with those big enough to lobby for special relief. The legislature is considering this limited tax relief because three corporate mainstays of greater Chicago have threatened to leave without it. One is the CME Group, operator of the Chicago Mercantile Exchange, the world’s largest futures exchange by volume. Another is the Chicago Board Options Exchange (CBOE), the world’s largest options exchange. The last is Sears, one of America’s oldest and most famous retailing giants.

My initial instinct is to have some sympathy for the companies. After all, America’s corporate tax system is brutally anti-competitive. Heck, government gets a greater share of corporate profit than shareholders!

But the column goes on to explain that at least one of the firms gave lots of money to the very same political predators that created the unfriendly tax system.

CME and the other beneficiaries of this special tax bill would have a far better case, however, if instead of pushing for special treatment for themselves, they used their clout to argue for a more market-friendly environment overall. After all, if the state’s tax treatment is making it hard for Sears and CME, the family restaurant or mom-and-pop shop down the corner is probably feeling the pinch too. Alas, equal treatment is not the Chicago way. Maybe that’s why we heard little from corporate Chicago when Mr. Quinn was campaigning for his tax hikes. To the contrary, back in June the Chicago News Cooperative reported that CME donated $50,000 to Mr. Quinn in the general election and $40,000 in the primary, $200,000 to Rahm Emanuel (a former CME board member) during his run for mayor of Chicago, and $150,000 to the man who really runs Illinois, House Speaker Mike Madigan.

I’ve made fun of the OccupyWallStreet protesters on many occasions (see here, here, here, here, here, and here), but this column shows that big business oftentimes does engage in corrupt deals with the political class. This is something that should deeply offend all decent people.

I also think it should offend the judiciary. I’m not a lawyer, so I don’t pretend to know the answer, but I’m guessing that state constitutions (like the U.S. Constitution) have clauses providing for equal protection under the law. So why, then, do they allow these corrupt forms of favoritism?

But I’m probably being naive in thinking that Illinois courts would actually care about justice. As such, don’t be surprised to see more stories like this in coming years.

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I’ve always thought of myself as a tough-on-crime kind of guy, but I’m increasingly sensitive to the fact that my attitude is only appropriate when laws are just and moral.

Unfortunately, government increasingly is an abuser of rights rather than a protector of rights. Allow me to elaborate.

I was tempted a few days ago to say that Jay Beeber was an American hero for single-handedly putting an end to the revenue-camera scam in Los Angeles, but I now have someone who truly deserves that label.

Michael Allison is, by all appearances, an ordinary American from a small town in Illinois. He is now is threatened with 75 years in jail because utterly reprehensible (and probably corrupt) officials are upset that he recorded them in the course of their taxpayer-financed duties.

What makes him a hero is that he refuses to let the local government seduce him into a plea deal that would keep him out of jail – but require him to admit guilt to something that shouldn’t be a crime.

Here’s an amazing – and distressing – set of news clips from a local news station.

By the way, here’s another example of a local television station doing an excellent job of exposing a local government that is trying to screw over an innocent and powerless person.

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Now that the debt-limit fight is basically over (the Senate will join the House in approving it later today), we need to immediately prepare for the next stage in the fight to stop big government and restore economic liberty.

President Obama and other leftists clearly have signaled that they want the new “super committee” – which will recommend $1.5 trillion of deficit reduction before Thanksgiving – to be a vehicle for “balance” and “shared sacrifice.” But if you look in a Statism-to-English dictionary, you learn that “balance” is a code word for higher taxes and “shared sacrifice” means class-warfare taxation.

I’ve already explained that a truly balanced approach requires nothing but spending restraint. And I’ve explained why Obama’s class-warfare taxation is misguided.

Today, let’s look at three real-world examples. We’ll start with the President’s home state. Early this year, using sneaky maneuvering, Illinois politicians raised the state’s income tax rate. I warned that this would drive jobs and businesses out of the state. That was an easy prediction, of course, and we’re already seeing results.Here’s a blurb from a Chicago Sun-Times story.

It’s becoming a habit around here — another day, another stalwart of financial services in Chicago threatening to leave town. On Thursday, it was the Chicago Board Options Exchange suggesting that higher corporate taxes in Illinois could cause it to take jobs out of state. The CBOE’s warning came a day after CME Group Inc. said the same thing. CME owns the Chicago Mercantile Exchange and the Chicago Board of Trade. The options market, with its headquarters and trading floor at 400 S. La Salle, employs about 580 people, not including traders who use its facilities. A CBOE spokesman said in a statement that “economic realities” could force a move.

Because the CME and CBOE are so high profile, I suspect Illinois politicians will provide some sort of one-off tax holiday or back-door subsidy to prevent this from happening. That won’t solve the problem, of course, which is that high tax rates inexorably will undermine the state’s competitiveness and that ordinary people will pay the highest price.

Yet this is what Obama wants to do to America. The United Kingdom is another example of how punitive class-warfare taxes backfire. Here are excerpts from a story at Tax-News.com.

In a tax-blow to the UK exchequer, the Virgin Group is planning to shift a portion of its operations to Switzerland to maximize tax efficiency. Virgin Enterprises, which owns the trademarks and rights to the Virgin brand will be relocated to Geneva to achieve tax efficiencies not possible in London. According to the conglomerate, the decision is as a result of plans to generate new revenue from franchising arrangements, particularly in emerging markets. …Virgin becomes the latest in a growing list of firms which have moved aspects of their businesses out of the UK for tax purposes in recent years.

Last but not least, let’s look at one example of what happens when nations do the opposite of Obamanomics. Bulgaria recently implemented a low-rate 10 percent flat tax. Is it helping? Well, here’s a passage from another Tax-news.com story.

Business formations in Bulgaria by entities from Romania and Greece have risen markedly in recent, new statistics show – a testament to the reforms put in place by Bulgarian authorities to attract foreign investment. Figures reported in the Bulgarian media show that the number of Romanian companies registered in Bulgaria soared from 33 in 2006, to 272 last year. Meanwhile, the number of Greek formations increased three-fold in the same period, according to tax authority data, to 2,072 in 2010. There were 800 registrations in the first half of this year alone, a trend that is likely to continue for the remainder of the year. Bulgaria offers one of the lowest corporate income tax rates in Europe at 10%. This is 15% lower than the rate offered in Greece, and 6% lower than in Romania.

And let’s not forget that zero-income-tax Texas is doing very well in America while high-tax states such as California (and, of course, Illinois) are losing jobs. But that’s a story for another day.

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It may not be very nice to say “I told you so” when the warnings you issue become reality, but I’m not a nice person (at least when it comes to greedy politicians imposing stupid policy).

So I’ll openly admit that I’m happy to read that entrepreneurs and job creators already are beginning to escape the kleptocrat politicians in Illinois. Here are a few highlights of an article in the News-Gazette.

The founder of Jimmy John’s said he has applied for Florida residency and may recommend that his corporate headquarters move out-of-state as a result of the Illinois tax increases enacted last week. Jimmy John Liautaud told The News-Gazette on Tuesday that he is angry about the moves, which boosted the individual income tax from 3 percent to 5 percent and the corporate income tax from 7.3 percent to 9.5 percent. “All they do is stick it to us,” he said, adding that the Legislature and governor showed “a clear lack of understanding.” …Jimmy John’s, which has its corporate headquarters on Fox Drive in Champaign, has more than 1,000 sandwich shops nationwide, many of them franchise operations. Champaign has been its corporate base, but Liautaud said it will not necessarily continue that way. …Once he collects information on alternative sites, he will present it to the company’s board of directors and ask the board to decide. As for himself, “my family and I are out of here,” he said. …Jimmy John’s employs 100 at the corporate office in Champaign and has 190 other employees who work elsewhere but come to Champaign every four weeks, Liautaud said. …He said he’s sick of being “pummeled.” “I’m not sophisticated enough, smart enough or politically correct enough to absorb it all,” he said. Jimmy John’s offices occupy 23,000 square feet on Fox Drive, and Liautaud said he had considered buying a 20,000-square-foot building just north of those offices. Those plans went out the window with the tax increase, he said. …James North, president of Jimmy John’s, echoed many of the same sentiments. “I absolutely love it here,” North said. “But when you do the math, it doesn’t add up. Florida looks pretty nice right now.”

It goes without saying, of course, that Illinois is not the only short-sighted state. New York politicians also have a fetish for driving taxpayers to other states.

A special welcome to Instapundit and NRO readers, and an addendum. This example of people and businesses escaping bad policy by crossing borders is more than just a cheerful anecdote. It is part of a process known as tax competition, which  is a powerful force for better policy between both states and nations.

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There is a very bizarre race happening in Illinois. The Governor and the leaders of the State Senate and General Assembly are trying to figure out how to ram through a massive tax increase, but they’re trying to make it happen before new state lawmakers take office tomorrow. The Democrats will still control the state legislature, but their scheme to fleece taxpayers would face much steeper odds because of GOP gains in last November’s elections.

As a result, the Illinois version of a lame-duck session has become a nightmare, sort of a feeding frenzy of tax-crazed politicians. Here’s the Chicago Tribune’s description of the massive tax hike being sought by the Democrats.

The 3 percent rate now paid by individuals and families would rise to 5 percent in one of the largest state tax increases in Illinois history. …Also part of the plan is a 46 percent business tax increase. The 4.8 percent corporate tax rate would climb to 7 percent… In addition, lawmakers are looking at a $1-a-pack increase in the state’s current 98-cent tax on cigarettes. …Democrats will still control the new General Assembly that gets sworn in Wednesday, their numbers were eroded by Republicans in the November election. With virtually no Republican support for higher taxes, Democratic leaders contend it will be easier to gain support for a tax hike in a legislature with some retiring members no longer worried about facing the voters.

If Governor Quinn and Democratic leaders win their race to impose a massive tax hike, that will then trigger another race. Only this time, it will be a contest to see how many productive people “go Galt” and leave the state. John Kass, a columnist for the Tribune, points out that the Democrats’ plan won’t work unless politicians figure out how to enslave taxpayers so they can’t escape the kleptocracy known as Illinois.

The warlords of Madiganistan — that bankrupt Midwestern state once known as Illinois — are hungry to feed on our flesh once again. This time the ruling Democrats are planning a…state income tax increase, with more job-killing taxes on corporations… A few tamed Republicans also want to join in and support a tax deal, demonstrating their eagerness to play the eunuch in the court of the pasha. And though they’ve been quite ingenious, waiting for the end of a lame-duck legislative session to do their dirty work, they forgot something important. They forgot to earmark some extra funds for that great, big wall. You know, that wall they’re going to need, 60 feet high, the one with razor wire on top and guard towers, equipped with police dogs and surrounded by an acid-filled moat. The wall they’re going to have to build around the entire state, to keep desperate taxpayers from fleeing to Indiana, Wisconsin and other places that want jobs and businesses and people who work hard for a living. …With the state billions upon billions in debt, and the political leaders raising taxes, borrowing billions more and not making any substantive spending cuts, we’ve reached a certain point in our history. The tipping point. Taxes grow. Employers run. The jobs leave. High-end wage earners have the mobility to escape. What’s left are the low-end workers who are stuck here. …the Democrats aren’t about to disappoint their true constituents. So they don’t cut, they tax. Because the true constituents of the Democratic warlords are the public service unions and the special interests that benefit from all that spending. Why should politicians make cuts and anger the people that give them power, the power that allows them access to treasure? …we reach another tipping point: The point at which those who are tied to government, either through contracts or employment, actually outnumber those who are not tied to government. Do the math on Election Day.

Illinois is America’s worst state, based on what it costs to insure state debt. The greedy politicians in Springfield think a tax hike will give them enough money to pay bondholders and reward special-interest groups. But that short-sighted approach is based on the assumption that people and businesses will cheerfully bend over and utter the line made famous by Animal House: “Thank you, sir! May I have another?”

Moving across state lines is generally not something that happens overnight. But this giant tax hike is sure to be the tipping point for a few investors, entrepreneurs, rich people, and employers. Each year, more and more of them will decide they can be more successful and more profitable by re-domiciling in low-tax states. When that happens, Illinois politicians will get a lesson about the Laffer Curve, just as happened in Maryland, Oregon, and New York.

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The mid-term elections were a rejection of President Obama’s big-government agenda, but those results don’t necessarily mean better policy. We should not forget, after all, that Democrats rammed through Obamacare even after losing the special election to replace Ted Kennedy in Massachusetts (much to my dismay, my prediction from last January was correct).

Similarly, GOP control of the House of Representatives does not automatically mean less government and more freedom. Heck, it doesn’t even guarantee that things won’t continue to move in the wrong direction. Here are five possible bad policies for 2011, most of which the Obama White House can implement by using executive power.

1. A back-door bailout of the states from the Federal Reserve – The new GOP Congress presumably wouldn’t be foolish enough to bail out profligate states such as California and Illinois, but that does not mean the battle is won. Ben Bernanke already has demonstrated that he is willing to curry favor with the White House by debasing the value of the dollar, so what’s to stop him from engineering a back-door bailout by having the Federal Reserve buy state bonds? The European Central Bank already is using this tactic to bail out Europe’s welfare states, so a precedent already exists for this type of misguided policy. To make matters worse, there’s nothing Congress can do – barring legislation that Obama presumably would veto – to stop the Fed from this awful policy.

2. A front-door bailout of Europe by the United States – Welfare states in Europe are teetering on the edge of insolvency. Decades of big government have crippled economic growth and generated mountains of debt. Ireland and Greece already have been bailed out, and Portugal and Spain are probably next on the list, to be followed by countries such as Italy and Belgium. So why should American taxpayers worry about European bailouts? The unfortunate answer is that American taxpayers will pick up a big chunk of the tab if the International Monetary Fund is involved. Indeed, this horse already has escaped the barn. The United States provides the largest amount of  subsidies to the International Monetary Fund, and the IMF took part in the bailouts of Greece and Ireland. The Senate did vote against having American taxpayers take part in the bailout of Greece, but that turned out to be a symbolic exercise. Sadly, that’s probably what we can expect if and when there are bailouts of the bigger European welfare states.

3. Republicans getting duped by Obama and supporting a VAT – The Wall Street Journal is reporting that the Obama Administration is contemplating a reduction in the corporate income tax. This sounds like a great idea, particularly since America’s punitive corporate tax rate is undermining competitiveness and hindering job creation. But what happens if Obama demands that Congress approve a value-added tax to “pay for” the lower corporate tax rate? This would be a terrible deal, sort of like a football team trading a great young quarterback for a 35-year old lineman. The VAT would give statists a money machine that they need to turn the United States into a French-style welfare state. This type of national sales tax would only be acceptable if the personal and corporate income taxes were abolished – and the Constitution was amended to make sure the federal government never again could tax what we earn and produce. But that’s not the deal Obama would offer. My fingers are crossed that Obama doesn’t offer to swap a lower corporate income tax for a VAT, particularly since we already know that some Republicans are susceptible to the VAT.

4. Regulatory imposition of global warming policy – This actually is an issue we needed to start worrying about before this year. The Obama Administration already is in the process of trying to use regulatory edicts to impose Kyoto-style restrictions on energy use, and 2011 may be a pivotal year for this issue. This issue is troubling because of the potential impact on economic growth, but it also represents an assault on the rule of law since the White House and the Environmental Protection Agency are engaging in regulatory overreach because they did not have enough support to get so-called climate change legislation through Congress. The new GOP majority presumably will try to use the “power of the purse” to limit the EPA’s power grab, and the outcome of that fight could have dramatic implications for job creation and competitiveness.

5. U.N. control of the Internet – The Federal Communications Commission just engaged in an unprecedented power grab as part of its “Net Neutrality” initiative, so we already have bad news for both Internet consumers and America’s telecommunications industry. But it may get worse. The bureaucrats at the United Nations, conspiring with autocratic governments, have created an Internet Governance Forum in hopes of grabbing power over the online world. This has caused considerable angst, leading Vint Cerf, one of inventors of the Internet (sorry, Al Gore) to warn: “We don’t believe governments should be allowed to grant themselves a monopoly on Internet governance. The current bottoms-up, open approach works — protecting users from vested interests and enabling rapid innovation. Let’s fight to keep it that way.” International bureaucracies are very skilled at incrementally increasing their authority, so this won’t be a one-year fight. Stopping this power grab will require persistent oversight and a willingness to reject compromises that inevitably give bureaucracies more power and simply set the stage for further demands.

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Here are a few predictions for next year. It will be hot in Dallas in July, it will be cold in Stockholm in February, and Governor Jerry Brown of California will ask Uncle Sam for some sort of bailout.

I’m actually not sure about the first two predictions, but I think the last one is as close to a sure thing as you can get. Sven Larson is one of America’s top experts on state fiscal issues (his blog is an excellent resource for people who want to keep informed about the shenanigans of governors and state legislatures), and here’s his assessment of the mess in California.

California state spending has outgrown the state’s tax base by 1.3 percentage points annually for 25 years. Simple arithmetic dictates that in lieu of constant tax increases, this perpetuates a deficit. From 1985 to 2009 state GDP in California grew by 5.5 percent per year, on average (not adjusted for inflation). Annual growth in state spending was 6.8 percent, on average. Three spending categories have dominated this spending spree: public schools, cash assistance and Medicaid. Making up half of state spending, they are outlets for traditional redistributive welfare state policy. …Of the three aforementioned spending categories, two have grown faster than state GDP, i.e., the tax base, throughout the past quarter-century: • Public school spending grew at 6.5 percent per year on average, one full percent faster than state GDP • Medicaid grew at 10.7 percent per year on average, approximately twice the rate of state GDP.

In other words, California is in a fiscal mess because spending has grown too rapidly. It’s unclear why taxpayers in other states should be ripped off so that Golden State politicians can maintain an unsustainable vote-buying racket – particularly when the state goes out of its way to punish economic growth and discourage job creation.

To make matters worse, bailouts (or even the expectation of bailouts) send a terrible signal. Matt Mitchell (no relation) of the Mercatus Center looked at precisely this issue and concluded that state politicians would be even more profligate if they got any indication that they could shift the tax burden to people in other states. He even found an interesting study showing how sub-national governments in Germany responded to this kind of perverse incentive structure. Here’s an excerpt from that research.

States with a softer budget constraint [i.e., greater expectation that the German national government will bail them out], have higher deficits and debts and receive more bailout funds. …The larger the expectation of a bailout, the higher the amount spent in a number of spending categories, and special interests are most likely to benefit from this additional spending. We also find that bailout expectations lead to less efficient state government service provision.

By the way, I don’t want to imply that this is solely a California issue. There are several states that have taxed and spent themselves into fiscal ditches. Indeed, it’s quite likely that Illinois may be the first state to experience a fiscal collapse.

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I ran across two interesting lists showing how politicians at the state and local level are often just as bad as the ones in Washington, DC. First, Forbes has an article identifying the 10 states with the highest income tax rates. The top rate is a big deterrent to entrepreneurs and investors, but it’s also important to look at the income level where the top tax rate takes effect. Yes, Hawaii, Oregon, and California have terrible tax policy, but Iowa, Maine, and Washington, DC, deserve special scorn for raping the middle class.

Hawaii:                       11% (income over $400,000 (couple), $200,000 (single))
Oregon:                      11% (income over $500,000 (couple), $250,000 (single))
California:                   10.55% (income over $1 million)
Rhode Island:             9.9% (income over $373,650)
Iowa:                          8.98% (income over $64,261)
New Jersey                 8.97% (income over $500,000)
New York:                   8.97% (income over $500,000)
Vermont:                     8.95% (income over $373,650)
Maine:                        8.5% (income over $39,549 (couple), $19,749 (single))
Washington, D.C.:      8.5% (income over $40,000)

Looking at the other major source of revenue for state and local governments, the Tax Foundation identifies the cities with the highest total sales tax rate – a number that often includes three separate levies by state, county, and city governments. Here are the top 10. Or should I say worst 10?

Birmingham AL              10.000%
Montgomery AL             10.000%
Long Beach CA                9.750%
Los Angeles CA               9.750%
Oakland CA                    9.750%
Fremont CA                     9.750%
Chicago IL                     9.750%
Glendale AZ                    9.600%
Seattle WA                     9.500%
San Francisco CA           9.500%

One thing that stands out is that California is on both lists, which helps explain why the state is such a basket case. Seattle deserves a special mention because at least there is no state income tax in Washington.

Last but not least, it’s worth mentioning that there’s no sales tax or income tax in New Hampshire. Live Free or Die!

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