Best and Worst News of 2022

Continuing a tradition that began back in 2013, let’s look at the best and worst developments of the past year.

Since I try to be optimistic (notwithstanding forces and evidence to the contrary), let’s start with the good news.

I’ll start by mentioning that we will now have gridlock in Washington. That’s probably a positive development, but I’ll explore that issue tomorrow as part of my “Hopes and Fears” column for 2023.

For today, let’s focus on three concrete developments from 2022 that unambiguously are positive.

States cutting tax rates and enacting tax reform – Since I’m a long-time advocate for better tax policy, I’m very pleased that more states are moving in the right direction. I especially like that the flat tax club is expanding. I’m also amused that a bad thing (massive handouts from Washington) backfired on the left (because many states decided to cut taxes rather than squander the money on new spending).

Chileans vote against a statist constitution – There was horrible news in 2021 when Chileans voted a hard-core leftist into the presidency. But we got very good news this year when the same voters overwhelmingly rejected a proposed constitution that would have dramatically expanded the power of government.

More families have school choice – Just like last year, we can celebrate that there was more progress on education this year. In 2021, West Virginia led the way. In 2022, Arizona was the best example. And we’ll discuss tomorrow why there are reasons to be optimistic about 2023.

Now let’s shift to the bad news of 2022.

I thought about listing inflation, which definitely caused a lot of economic damage this year. But the bad monetary policy actually occurred in 2020 and 2021 when central bankers overreacted to the pandemic.

So I’m going to write instead about bad things that specifically happened in 2022.

Biden semi-successfully expands the burden of government – The president was able to push through several bad proposals, such as the so-called Inflation Reduction Act and some cronyist subsidies for the tech industry. Nothing nearly as bad as his original “build back better” scheme, but nonetheless steps in the wrong direction.

The collapse of small-government conservatism in the United Kingdom – Just as today’s Republicans have deviated from Reaganism, the Conservatives in the United Kingdom have deviated from Thatcherism. Except even worse. Republicans in the USA acquiesce to higher spending. Tories in the UK acquiesce to higher spending and higher taxes.

Massachusetts voters opt for class warfare – Starting tomorrow, Massachusetts no longer will have a flat tax of 5 percent. That’s because voters narrowly approved a class-warfare based referendum to replace the flat tax with a new “progressive” system with a top rate of 9 percent. Though bad news for the state’s economy will be offset by good news for moving companies.

P.S. I almost forget to mention that the best thing about 2022 occurred on January 10 when the Georgia Bulldogs defeated Alabama to win the national championship of college football.

P.P.S. While 2022 was a mixed bag, history buffs may be interested in knowing that it was the 100th anniversary of a big tax rate reduction (top rate lowered from 73 percent to 58 percent) implemented in 1922 during the under-appreciated presidency of Warren Harding.

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The Most Important Ballot Referendum of 2022

While most people pay attention to which political party enjoys success when there’s an election, I think it’s also important to look at ballot initiatives.

• In 2021, voters in the left-leaning state of Washington overwhelmingly registered their opposition to capital gains taxation.
• In 2020, voters in the deep-blue state of Illinois said no to the big spenders by voting to preserve the state’s flat tax.
• In 2019, voters in left-leaning Colorado also said no to the big spenders by voting to protect the state’s spending cap.

But, as we’ve seen in California and Oregon, not every referendum produces a sensible result.

Today, we’re going to look at the most important ballot initiative of 2022. But before looking at the details, here’s a map showing the states gaining and losing population when Americans move across borders.

You’ll notice that Massachusetts is one of the top states for outbound migration, which means people are “voting with their feet” against the Bay State.

But bad news can become worse news. And that will definitely be the case if voters in Massachusetts approve a referendum next month to junk the state’s flat tax and replace it with a class-warfare system that has a top rate of 9 percent.

Jeff Jacoby wrote last year about the idea in a column for the Boston Globe.

A century-old provision of the Massachusetts Constitution commands that if the commonwealth taxes income, it must do so at a “uniform rate.” Five times in the modern era — in 1962, 1968, 1972, 1976, and 1994 — tax-and-spend liberals have invited voters to discard that rule and make it legal to soak the rich at higher tax rates. Five times voters have said no. …There is considerable arrogance in the way advocates of the surtax blithely disregard the voters’ repeated refusal to overturn the constitutional ban. Their attitude seems to be that no matter how many times the people uphold the uniform-rate rule, there is no reason to take them seriously. …more than 150 Massachusetts businesses representing almost 16,000 workers sent lawmakers an open letter imploring them not to hobble the state’s economy with a stiff new tax, and expressing “alarm” at the proposed constitutional amendment. They…know that a surtax aimed at millionaires is bound to injure countless people who will never earn anywhere close to a million bucks.

The Wall Street Journal has editorialized against the proposal.

…progressives in Boston want to join New York and other nearby states in a high-tax arms race. …Bay State ballots in November will give voters the choice to place a 4% surtax on incomes above $1 million, bringing the top rate to 9% from 5%. The proposal would amend the state constitution to remove its flat-tax mandate. Passing the measure would rocket Massachusetts to seventh from 31st on the list of states with the highest marginal income-tax rates. …A $2.3 billion revenue surplus shows that the state is already taxing more than it needs. This year’s tax haul was so big it triggered a largely forgotten state law that caps revenue. Residents may soon receive checks that refund a portion of last year’s taxes. …Approving the tax would speed up a wealth exodus already under way. The Pioneer Institute last year noted that Massachusetts’ tax base has been eroding, and there’s no surprise about where the escapees are going. The top two destinations are Florida and New Hampshire, both of which lack an income tax. …The constitution’s flat rate mandate is a crucial limit on the demands of interest groups for ever-more spending. If tax rates rise and the revenue cap goes away, spending will soar to snatch the new revenue and soon the politicians will return to seek even higher rates, as they always do.

The economic consequences of class-warfare taxation are never positive.

And that will be true in Massachusetts. A study from the Beacon Hill Institute in Massachusetts estimates the economic damage that the surtax would cause.

…we find, using our in-house computer model (MA-STAMP) that the effects on the economy will be as follows: In its first year of implementation, the amendment will cause the state to lose 4,388 working families due to outmigration. This outmigration plus a reduction in labor hiring and labor-force participation will cause a loss of 9,329 jobs. …the state economy, real (inflation-adjusted) gross domestic product, will shrink by $431 million… Advocates of the measure claim that it will make possible a $2 billion annual in state spending. …Instead, we find that the revenue yield of the tax will be far less, the result of the expected shrinkage in economic activity. (See Table E-2.) In its first year of implementation, combined state and local revenues will rise by only about $1.2 billion.

Here’s a table showing some of the negative effects.

Alex Brill of the American Enterprise Institute also estimated that revenues would be lower than expected once the effects of the Laffer Curve are incorporated into the analysis.

Here are some excerpts from his article in the Hill.

Modifying the revenue forecast to incorporate evidence from the academic literature about likely behavioral changes yields a significantly lower estimated revenue pickup. I estimate that about 400 of the 22,000 taxpayers affected by the surtax would exit the state and many others would reduce work or shift and relabel their income to avoid the tax. By my estimate, the surtax would generate approximately $1.5 billion in 2023, since these behavioral responses would offset 32 percent of the revenue gain that would occur if taxpayers kept their behavior unchanged. Using a similar approach, Tufts University’s Center for State Policy Analysis recently estimated that the proposed surtax would generate only $1.3 billion in 2023.

Last but not least, the Tax Foundation crunched the numbers and also found the surtax would cause significant economic damage.

…while no one would mistake Massachusetts for a low-tax state, it has carved out a place as a competitive area to live and work within the Northeast corridor. …but consider the Commonwealth’s ranking on the Tax Foundation’s State Business Tax Climate Index…in 2022, the Bay State still ranked 34th overall on the Index—well below the median. …Massachusetts’ competitive tax advantage in New England is primarily due to its individual income and sales tax systems, which rank 11th and 12th on the Index, respectively. With regard to its neighbors, only New Hampshire has a better overall Index ranking than Massachusetts. …In 2007, Christina Romer and David Romer, professors of economics at the University of California Berkeley, conducted a study to determine the impact of legislated tax changes on the economy. …The study found that a tax increase equal to 1 percent of gross domestic product (GDP) resulted in an estimated 3 percent decline in GDP after three years. …If the Romer and Romer study were applied to the Massachusetts surtax it would result in a 0.942 percent decline in GDP after three years. In other words, the Commonwealth’s total economic output could contract by $5.98 billion by the end of 2025.

Here’s a table from the report, showing that zero-income tax New Hampshire and Florida already are big winners when people escape Massachusetts.

If the referendum is approved, we can easily predict that future versions of this chart will show much bigger numbers.

Simply stated, some of the geese with the golden eggs will fly away (while the ones that stay will decide to produce fewer eggs – as well as figure out ways to protect the eggs that remain).

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Will the Supreme Court Limit Tax Imperialism by Massachusetts?

On the rare occasions when I write about the Supreme Court, it’s usually to grouse that the Justices don’t defend the Constitution’s limits on the federal government.

For example, the Court engaged in tortured reasoning to rule in favor of Obamacare even though there’s nothing in Article 1, Section 8, that gives Washington the power to mandate the purchase of health insurance (though that awful decision by Chief Justice John Roberts looks brilliant compared to the even-worse 1942 decision that gave Washington the power to control whether a farmer could grow grain on his own farm to feed his own hogs).

But perhaps the Supreme Court can make up for some past mistakes by accepting – and then properly deciding – a case from New Hampshire.

The Granite State wants to block the government of Massachusetts from imposing taxes on people who live and work in New Hampshire.

For some background on this legal battle, the Wall Street Journal has a new editorial on this topic.

Can a state collect income tax from nonresidents working remotely for in-state businesses? Massachusetts, New York and some other states claim they can, and now New Hampshire is asking the Supreme Court to protect its citizens from this tax grab. …New Hampshire, which imposes no income tax on wages, last fall sued Massachusetts and is asking the Supreme Court to hear its case (N.H. v. Mass.). “Massachusetts has unilaterally imposed an income tax within New Hampshire that New Hampshire, in its sovereign discretion, has deliberately chosen not to impose,” says the Granite State. Under longstanding Supreme Court precedent, states can only collect taxes that are “fairly apportioned” and “fairly related to the services provided by the State” within their borders. …Massachusetts and other states are forcing nonresidents to pay income taxes even though they don’t use public services. …If the Court doesn’t intervene, remote workers who are unfairly taxed by other states will have no recourse for redress beyond biased state tax tribunals. States like California may copy the Massachusetts and New York playbook.

Jeff Jacoby, a columnist for the Boston Globe, argues his state is one the wrong side of this fight.

In April, the Department of Revenue published an “emergency regulation” declaring that any income earned by a nonresident who used to work in Massachusetts but was now telecommuting from out of state “will continue to be treated as Massachusetts source income subject to personal income tax.” For the first time ever, Massachusetts was claiming the authority to tax income earned by persons who neither lived nor worked in Massachusetts. …Massachusetts has indeed injured New Hampshire… It has launched what amounts to an attack on a fundamental aspect of New Hampshire’s sovereign identity — its principled refusal to tax the income of New Hampshire residents earned in New Hampshire. It was one thing for Massachusetts to withhold taxes from New Hampshire residents for income earned within the borders of Massachusetts. With its new tax rule, however, Massachusetts is reaching over the border to extract taxes, thereby undermining a core New Hampshire policy. …the Supreme Court has the power to shut down such overreaching. And now, thanks to New Hampshire, it has the opportunity.

Professor Ilya Somin from George Mason University’s law school elaborates in a column for Reason.

New Hampshire v. Massachusetts…has some real merit, and also has important implications for the future of American federalism. …New Hampshire’s motion…in the Supreme Court outlines two theories as to why the Massachusetts rule is unconstitutional: it violates the Dormant Commerce Clause (which prevents states from regulating and taxing economic activity beyond their borders), and the Due Process Clause of the Fourteenth Amendment, which has long been held to bar state taxation of people who neither live nor work within its borders. Both arguments build on one of the bedrock principles of American federalism: that state sovereignty is territorial in nature. States do not have the power to regulate and tax activity beyond their borders. …most of Massachusetts’ arguments rely on the notion that the NH workers in question have close connections to the Massachusetts economy and benefit from interacting with it . Therefore the state claims it has a right to keep taxing them as before. …If Massachusetts prevails…, it could potentially have dire implication for the growing number of people who work as remote employees for firms located in another state. The latter state could tax their income even if they never set foot there. This would also make it much harder for people to “vote with their feet” for states with lower taxes, better public policies, and other advantages. …The “Live Free or Die State” deserves to win this important case.

The above columns mostly focus on the legal aspects of the case.

From my perspective, I’m more concerned about upholding the principle that the economic powers of governments should be constrained by borders.

That’s the reason why I defend so-called tax havens, even when that leads to abuse (government officials engaging in everything from name calling to legal threats). Simply stated, high-tax nations shouldn’t have the right to tax economic activity that occurs inside the borders of low-tax jurisdictions.

After all, if we want to constrain “Goldfish Government,” taxpayers need some ability to escape oppressive tax regimes.

The bottom line is that the Supreme Court should take this opportunity to limit the Bay State’s greedy politicians.

P.S. This case is partly a fight between proponents of territorial taxation (the good guys) and proponents of extraterritorial taxation (the bad guys).

P.P.S. The Supreme Court unfortunately did recently rule on the wrong side of a case involving extraterritorial taxation.

P.P.P.S. If you want a practical example of what this means, read this column about the taxation of successful Olympic athletes.

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Is the Massachusetts Flat Tax in Danger?

Regarding fundamental tax reform, there have been some interesting developments at the state level in recent years.

Utah, North Carolina, and Kentucky have all junked their so-called progressive systems and joined the flat tax club.

That’s the good news.

The bad news is that Illinois politicians are desperately trying to gut that state’s flat tax.

And the same thing is true in Massachusetts.

The Tax Foundation has a good explanation of what’s been happening in the Bay State and why it matters for the competitiveness, job creation, and entrepreneurship.

A joint constitutional convention of Massachusetts lawmakers has voted 147-48 to approve H.86, dubbed the Fair Share Amendment, to impose a 4 percent income tax surcharge on annual income beyond $1 million. The new tax would be levied in addition to the existing 5.05 percent flat rate, bringing Massachusetts’ total top rate to 9.05 percent. …Massachusetts requires legislatively-referred constitutional amendments be passed in consecutive sessions, meaning that the same measure would need to be approved in the 2021-2022 legislative session before it would be sent to voters in November of 2022. The millionaires’ tax, though targeted at a wealthy minority of tax filers in the Bay State, would cause broader harm to Massachusetts’ tax structure and economic climate. It would eliminate Massachusetts’ primary tax advantage over regional competitors… The Bay State’s low, flat income tax on individuals and pass-through businesses is the most competitive element of its tax code, giving the Commonwealth a clear strength compared to surrounding states and regional competitors. Income tax rate reductions in recent years have helped shed the moniker of “Taxachusetts” while setting up the Bay State to be a beneficiary of harmful tax rate increases in surrounding states. However, a 9.05 percent top rate would be uncompetitive even in a high-tax region. The amendment would hit Massachusetts pass-through businesses with the sixth-highest tax rate of any state.

Here’s a map showing top tax rates in the region (New Hampshire has an important asterisk since the 5-percent rate only applies to interest and dividends), including where Massachusetts would rank if the new plan ever becomes law.

The Boston Globe reports that lawmakers are very supportive of this scheme to extract more money, while the business community is understandably opposed.

A measure to revive a statewide tax on high earners received a glowing reception on Beacon Hill Thursday, suggesting an easy path ahead despite staunch opposition from business groups. “We are in desperate need for revenue for our districts,” said Senator Michael D. Brady of Brockton, one of the proposal’s more than 100 sponsors and a member of the Joint Committee on Revenue…. “We have tremendous unmet needs in our Commonwealth that are hurting families, hurting our communities, and putting our state’s economic future at risk,” said Senator Jason M. Lewis of Winchester, the lead sponsor of the Senate version of the proposal. …business groups…came armed with arguments that hiking taxes on the state’s highest earners would drive entrepreneurs — and the jobs and tax revenue they create — out of the state, as well as unfairly harm small- and mid-sized business owners whose business income passes through their individual tax returns. “Look, we’re trying to prevent Massachusetts from becoming Connecticut,” said Christopher Anderson, president of the Massachusetts High Technology Council.

Meanwhile, the Boston Herald reports that the Republican governor is opposed to this class-warfare tax.

Gov. Charlie Baker cautioned the Legislature against asking for more money from taxpayers with the so-called millionaire tax… “I’ve said that we didn’t think we should be raising taxes on people and I certainly don’t think we should be pursuing a graduated income tax,” Baker told reporters yesterday. …Members of Raise Up Massachusetts, a coalition of community organizations, religious groups and labor unions, are staunchly supporting the tax that is estimated to raise approximately $2 billion a year. …The Massachusetts Republican Party is sounding the alarm on what they’re calling, “the Democrats’ newest scheme,” to “dump” the state’s flat tax system.

The governor’s viewpoint is largely irrelevant, however, since he can’t block the legislature from moving forward with their class-warfare scheme.

But that doesn’t mean the big spenders in Massachusetts have a guaranteed victory.

Yes, the next session’s legislature is almost certain to give approval, but there’s a final step needed before the flat tax is gutted.

The voters need to say yes.

And in the five previous occasions when they’ve been asked, the answer has been no.

Overwhelmingly no.

Even in 1968 and 1972, proposals for a so-called progressive tax were defeated by a two-to-one margin.

Needless to say, that doesn’t mean voters will make the right choice in 2022.

The bottom line is that if the people of Massachusetts want investors, entrepreneurs, and other job creators to remain in the state, they should again vote no.

But if they want to destroy jobs and undermine the Bay State’s competitiveness, they should vote yes.

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