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Archive for the ‘States’ Category

Federalism is very desirable because it allows different parts of the country to make different decisions, and this helps to teach us about what works. And what doesn’t.

It also means Americans can “vote with their feet” by migrating across local borders and state borders.

This happens a lot, as illustrated by this map from the Census Bureau.

While this map is fascinating, it also can be deceiving because some counties have very few people and others have millions of people.

It appears that internal migration might be a wash for states such as California and New York, for instance, since parts of both states are both green and purple.

If you look at a state-level migration map, however, you’ll find that both states lost population.

Why? Because big losses in some heavily populated cities (circled in red above) easily outweighed population gains in rural counties.

So why are people leaving some places? Are there lessons to be learned?

One obvious takeaway is that Americans are fleeing states governed by the left, as Kerry McDonald explains for the Foundation for Economic Education.

US Census Bureau data released in December showed that restrictive states such as California, Illinois, New York, and Massachusetts lost population between July 2020 and July 2021, while states with less-restrictive virus policies like Texas, Arizona, and Florida gained population during that time. …Fight or flight is a tough choice for families, but at least it’s a choice that Americans can enjoy thanks to federalism and the ability to vote with our feet.

And Americans are fleeing localities governed by the left, as Michael Barone explains in the Washington Examiner.

…the biggest losses, in both population and percentage loss, came in four of the nation’s six largest metropolitan areas: San Francisco/San Jose (-2.6 percent), New York (-1.8 percent), Chicago (-1.1 percent) and Los Angeles/Riverside (-0.8 percent). Each of the first three, in just 15 months from April 2020 to July 2021, lost a population that equaled 20 percent of their total population gain in the 20 years between 2000 and 2020. …it’s also noteworthy, and probably more permanent, that people with modest educations and incomes have fled far beyond the exurbs. …the nation’s population growth and its economic dynamism had been concentrated disproportionately in the exurbs, which typically have reasonable tax rates and development-friendly regulations. …the self-harm that liberal and progressive politicians have inflicted…voters even in New York, Chicago, Los Angeles, and San Francisco are recoiling.

The moral of the story is that voters sometimes make the mistake of voting for tax-and-spend politicians, but at least they have enough sense to then escape the places being harmed by statist policies.

P.S. Switzerland in the gold standard for federalism in the world, but Canada also deserves favorable attention. And I recently learned that there’s real federalism in Spain.

P.P.S. Sadly, federalism has declined in the United States.

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How do we know people don’t like taxes?

  • They tend to reject candidates who support higher taxes, as George H.W. Bush and other politicians have learned.
  • Then tend to vote against higher taxes when given an opportunity (though they sometimes will vote to tax other people)
  • They tend to migrate from high-tax jurisdictions to low-tax jurisdictions for direct and indirect reasons.

Today, we’re going to elaborate on the final reason.

Let’s start with this chart from one of the daily missives from the Committee to Unleash Prosperity. As you can see, it’s not just people that move. It’s their money as well.

The bottom line is that the two states – California and New York – with ultra-high tax rates are losing the most taxable income.

Let’s call this the revenge of the Laffer Curve because it shows us that high tax rates can backfire.

Jon Miltimore addressed this topic in a new column for the Foundation for Economic Education.

Here are some of the highlights, starting with some data on how some poorly governed cities are losing residents.

Three of the top five metros that saw sharp declines between July 1, 2020, and July 1, 2021 were in California. Leading the way was the Los Angeles-Long Beach metropolitan area, which lost 176,000 residents, a 1.3 percent drop. Next was the San Francisco-Oakland-Berkeley metro, which saw a decline of 116,000 residents (2.5 percent decline), followed by San Jose-Sunnyvale-Santa Clara, which shed some 43,000 residents (2.2 percent drop). …The New York-Newark-New Jersey metropolitan area saw a decline of 328,000 residents, the highest in the nation in raw numbers. The Chicago area, meanwhile, saw a decline of some 92,000 residents.

Here’s a chart from his article.

I’m definitely not surprised to see New York, San Francisco, and Chicago on the list. After all those cities have crummy governments.

The other two cities, by contrast, just have the misfortune of being in a poorly governed state.

Jon explains a big reason why this domestic migration is taking place.

…the reasons people choose to migrate tend to be complex and varied… However, we can see the US flight from its largest metropolitan is part of a bigger trend. North American Van Lines (NAVL), a trucking company based in Indiana, puts out an annual report that tracks migration patterns in the United States. The states with the most inbound migration in 2021 were South Carolina, Idaho, Tennessee, North Carolina, and Florida. The leading outbound states were Illinois, California, New Jersey, Michigan, and New York. The pattern here is clear. Americans are fleeing highly-regulated, highly taxed states. They are flocking to freer states. …We heard a great deal about “the Great Reset” during the pandemic. …It may be that “the reset” involves Americans abandoning high-tax, high-regulatory cities and states for freer ones.

To be sure, there are factors other than taxation. And there are factors other than government policy (people really like California’s wonderful climate, for instance, but they will escape when policy becomes unbearable).

The bottom line is that people are slowly but surely voting with their feet against statism. They are choosing red states over blue states. There’s a lesson for Joe Biden, though he’s probably not listening.

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My main objection to government employees is that they work for bureaucracies that should not exist (especially the ones in Washington).

That being said, I also don’t like how bureaucrats are overpaid compared to workers in the productive sector of the economy.

How much are they overpaid? The Committee to Unleash Prosperity has a daily newsletter, and here’s a chart from yesterday’s edition that compares compensation levels for private-sector employees and state and local bureaucrats.

Just in case you are wondering whether these numbers are accurate, you can go this website from the Bureau of Labor Statistics, scroll down to the “Pay and Benefits” section, and then click on “Data Finder” for “Employer Costs for Employee Compensation.”

You will then find that average hourly costs (including benefits) for state and local government workers are about $55, compared to about $38 for workers in the economy’s productive sector.

Government employee unions and other defenders of the status quo often will argue that such numbers are comparing apples and oranges because bureaucrats tend to be older and working in fields that require greater skills.

Those are legitimate arguments (indeed, similar to the arguments that debunk the idea of a gender pay gap).

But a legitimate argument is not the same as a compelling argument. The Department of Labor’s data on voluntary quit rates definitely suggests that bureaucrats (both federal and state/local) have a big compensation advantage over workers in the private sector.

If you want a concrete example of how government workers receive windfalls, Adam Andrzejewski opined last year about lifeguards in Southern California. Here’s some of what he wrote for the Wall Street Journal.

Being a lifeguard isn’t easy, but in Los Angeles it can be lucrative. Auditors at OpenTheBooks.com found 82 county lifeguards earning at least $200,000 including benefits and seven making between $300,000 and $392,000. Thirty-one lifeguards made between $50,000 and $131,000 in overtime alone. After 30 years of service, they can retire as young as 55 on 79% of their pay. The Los Angeles County Lifeguard Association makes all this possible. …By comparison, the top-paid public lifeguard in Florida made $118,000, including benefits—though the pay goes further in the Sunshine State, which has no income tax. Even in New York City, the top-paid lifeguard made only $168,000. Think of the Los Angeles Country Lifeguard Association as the teachers union of “Baywatch.”

Sounds like they all belong in the Bureaucrat Hall of Fame.

P.S. Click here to learn why state and local governments sign contracts providing absurd levels of pay and benefits.

P.P.S. Workers in the private sector work more hours, so annual pay gaps are not as large as hourly pay gaps.

P.P.P.S. Putting lifeguards to shame, one state employee in California raked in more than $800,000 in one year.

P.P.P.P.S. Adding insult to injury, the lavish retirement benefits of state and local bureaucrats often are dramatically underfunded.

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I regularly share reports that measure how states rank for economic policy.

Now we can augment this collection.

A website called Money Geek has issued a report, authored by Jeff Ostrowski, which ranks states that are most friendly and least friendly to a hypothetical middle-class family.

This map has the details. The best states (led by Wyoming, Nevada, and Alaska) are dark blue, while the worst states (led by Illinois, Connecticut, and New Jersey) are dark grey.

Here are some of the main findings, including the fact that people “vote with their feet” by moving to low-tax states.

Illinois has the highest tax burden in the U.S., with an estimated tax amount of $13,894 for the hypothetical family. Wyoming only imposes approximately $3,279 for the same family, making it the top state in terms of tax-friendliness. 4 out of 5 of the most tax-friendly states saw population growth at or above the national average (Wyoming, Nevada, Florida and Tennessee). Illinois and Connecticut received a grade of E for being the least tax-friendly states in the nation. Illinois experienced a population decline, while Connecticut’s population grew by just 0.1% — lower than the national average of 0.2%.

Interesting results. First and foremost, we have more evidence that Illinois is a basket case.

And it has a governor who wants to make a bad situation even worse.

I also think it’s worth noting that all the best states have no income tax.

The reports has lots of interesting data, but it doesn’t tell us everything we should know.

Before I explain why the numbers should be taken with a grain of salt, read the report’s methodology.

To calculate the least and most tax-friendly states, we researched income, sales and property tax rates by state. Using expenditure and income data from the Bureau of Labor Statistics’ Consumer Expenditure Survey, we constructed a hypothetical family with one dependent, gross income of $82,852, and a home worth $349,400 (the median new home price at the time we conducted our research). We then estimated the state taxes this hypothetical family would pay in each state. We ranked the states based on…the size of the tax payment.

There’s nothing wrong with this methodology, assuming the goal is simply to measure the tax burden on a particular type of household.

But if the goal is to rank tax systems, there are three reasons why the report is incomplete or misleading.

First, it is not a measure of how tax systems affect economic performance. The most bizarre results in the report is that California, with a very punitive, class-warfare tax system, ranks above Texas, which has no income tax.

Why is this misleading? Because it’s important not only to measure how much of a family’s income is grabbed by government, but also whether a government has policies that make it more difficult to earn money in the first place.

In other words, there’s a reason that taxpayers and businesses are moving from California to Texas, notwithstanding the results from Money Geek.

Second, it doesn’t tell us anything about whether states are providing good services in exchange for the taxes that are being collected.

In an ideal world, states would use tax revenues to finance genuine “public goods.” In reality, taxes often are used to funnel undeserved money to powerful constituencies such as state and local bureaucrats.

And it’s worth noting that there are big differences in how states perform on basic functions such as education, infrastructure, and crime control (and the same is true for cities).

Third, it is not adjusted for the cost of living in different states. A family in Nebraska with a $350,000 house and about $83,000 of income obviously lives much better than a similar family in New Jersey. Why? Because money goes much farther in states with a lower cost of living.

This map from the Tax Foundation shows that red and orange states can be much more expensive than green and blue states.

P.S. If you want a ranking of economic liberty for metropolitan areas, click here.

P.P.S. Click here if you want a ranking of states based on occupational licensing (a form of employment protectionism).

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I wrote two months ago about Iowa lawmakers voting for a simple and fair flat tax.

I explained how this reform would make the state more competitive, but I want to build upon that argument with some of the Tax Foundation’s data.

Starting with this map from the State Business Tax Climate Index, which shows Iowa in 38th place for individual income taxes.

That low ranking is where the state’s tax code was as of July 1, 2021, so it obviously doesn’t reflect the reforms enacted earlier this year.

So where will the state rank with the new flat tax?

The Tax Foundation crunched the data and shows the state will jump to #15 in the rankings.

The above table shows that the jump is even more impressive when you factor in some modest pro-growth changes that took place a few years ago.

What a huge improvement over just a few years. The only state that may beat Iowa for fastest and biggest increase in tax competitiveness is North Carolina, which jumped 30 spots in just one year.

P.S. Politicians in New York must be upset that there’s no way for them to drop lower than #50. But at least they can take comfort in the fact that they are worse than California.

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State Tax Progress

Last year I shared a very encouraging map, which identified the many states that have been cutting tax rates.

After the November elections, I wrote a couple of encouraging columns about voters making sensible decisions when given the ability to vote for higher or lower taxes.

Later that month, I updated my five-column table showing which states have the best and worst tax systems.

And I ended the year with a look at the Tax Foundation’s State Tax Business Climate Index.

All things considered, not a bad year. At least at the state level.

Well, we may see more progress this year.

Grover Norquist of Americans for Tax Reform has a column in the Wall Street Journal about an ongoing revolution of pro-growth tax cuts at the state level.

…in the 50 states there is a dramatic increase in tax competition to provide the best government at the lowest cost. …Americans have noticed that high-tax states don’t provide better roads, education or other services. Florida (with 22 million residents) has no income tax and the state spends half as much as New York (20 million residents). New York has a top state income tax of 8.82% (soon rising to 10.9%) and was the only state to raise its personal income-tax rate during the pandemic. …state leaders have discovered that…marginal income-tax rate…reduction is enabled by spending restraint. North Carolina provided the best example of this strategy over the past seven years. …Louisiana, under the leadership of Senate Majority Leader Sharon Hewitt, has set a path to reduce its income tax every year triggers are met. These triggers could take Louisiana’s income tax to zero by 2034… Ten other states have begun the march to a zero rate.

The column also mentions other states, such as Iowa, that hopefully will replace discriminatory regimes with simple and fair flat taxes.

Not everyone is happy about these developments.

In a column for the Washington Post, Catherine Rampell points out that some of the tax cutting was enabled by Biden’s big handouts to state governments.

Democrats in Congress have made it much easier for state-level Republicans to slash taxes this year… That’s because Democrats have shoveled a ton of federal money onto the states… Big budget surpluses have inspired the governors of Missouri, South Carolina and Iowa to propose cuts to their income tax rates. Utah’s Senate recently approved a $160 million tax cut, with its state House of Representatives expected to make the proposal even more expansive. And Mississippi is working to cut taxes on food sales and car tags — and to phase out its income tax entirely. …Even blue and purple states may jump on the traditionally conservative tax-cut bandwagon, too. …after President Biden took office, Democrats decided to go big with their stimulus bill… Democrats sent states and localities an additional $500 billion, including direct state and local covid relief grants, plus separate funding for education, transit and other programs. …many states have more cash than they know what to do with. …total state and local receipts were 26 percent higher in 2021 than they were in 2019.

Here’s the part she doesn’t like.

Republicans are taking these deficit-financed federal dollars, passing them on to constituents in the form of lower taxes and reaping the political benefits — all while being able to blame Democrats for the enormous cost they add to the federal debt. …perhaps red states reasonably assume that Democrats won’t learn their lesson — and will keep the federal dollars flowing, even if doing so hands Republicans home-state political victories.

Interestingly, congressional Democrats recognized this might be a problem.

But the anti-tax cut language they included in their handout legislation has not been effective.

Democrats did include legislative language that forbade any pandemic relief funds from being used to “either directly or indirectly” finance tax cuts. But enforcing that provision was always going to be difficult… Federal judges have already blocked Treasury from enforcing the no-tax-cut provision in at least 15 states… More litigation is pending, but these developments have emboldened Republicans, who are eager to use Democrats’ sloppy bill design against them.

All of this may be a quandary for libertarians and conservatives.

Biden’s boondoggle stimulus was bad legislation. And the same can be said for major parts of Trump’s pandemic emergency spending bills.

Yet one fortunate side effect is that state governments have had so much money that some of them have been cutting taxes.

But some of them also have been spending more money, and that won’t lead to good results.

All things considered, this really shouldn’t be a quandary. We got two bad things (more federal spending and more spending in some states) and one good thing (tax cuts in some states).

P.S. At some point, the politicians in Washington will have to restore some fiscal sanity, but I’m not holding my breath for good policy.

P.P.S. I suspect we’ll see even more interstate tax migration over the next few years. Simply stated, many people would rather live in libertarian-oriented states rather than greed-oriented states.

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I wrote last year about an encouraging trend of lower tax rates at the state level.

As you can see from this map, one of the states moving in the right direction is Iowa.

But Governor Kim Reynolds isn’t satisfied with just lowering tax rates, which is a worthy goal, of course.

She is now proposing to get rid of the state’s so-called progressive tax and replace it with a flat tax.

This would be very good news for Iowa’s economy and Iowa’s taxpayers.

An article in the Quad-City Times explains Governor Reynolds’ proposal.

In four years, every Iowan’s income would be taxed at 4% by the state under a new proposal from Gov. Kim Reynolds. Reynolds introduced her flat income tax proposal during last week’s annual Condition of the State address to the Iowa Legislature, encouraging the lawmakers to pass her idea.“Flat and fair,” Reynolds proclaimed during the speech. …Ten states currently have a flat state income tax, including Iowa’s eastern neighbor, Illinois. The list includes more blue states like Michigan and Massachusetts, but also red states like Kentucky and Utah. …Under Reynolds’ new plan, top state income tax rate would be eliminated each year over the next four years, until in 2026 every Iowa worker, regardless of income level, pays 4 percent. …The plan would reduce state revenue by $226 million in the first year, and by $1.6 billion at full implementation… Reynolds said during her speech. “Yes, we’ll have less to spend once a year at the Capitol, but we’ll see it spent every single day on Main Streets, in grocery stores, and at restaurants across Iowa. We’ll see it spent in businesses instead of on bureaucracies.” …Republican legislative leaders praised Reynolds’ proposal and said they are eager to begin working on legislation.

The article also explains the previous tax reform, which focused on lowering marginal tax rates.

In 2021, Iowa had nine state income tax rates, tied for the second-most in the country. Most Iowa workers’ income was taxed at between 4.14%, with rates increasing as income increased, up to a top rate of 8.53% for those earning over $78,435 of taxable income. As a result of tax reform passed by the Iowa Legislature and signed into law by Reynolds in 2018, the number of tax brackets will be reduced to four, ranging between 4.4 and 6.5%.

I showed last year how that legislation moved Iowa up one level in a ranking of state income taxes.

Well, here’s an updated look at the state’s total improvement if the governor’s plan for a flat tax is enacted.

Iowa jumps from the worst column to the next-to-best column.

And if I ranked states by the rate of their flat tax, Iowa’s 4 percent rate would be lower than the rates in North Carolina, Kentucky, Illinois, Michigan, Utah, and Massachusetts.

Not as good as the states with no income taxes, but still impressive.

P.S. I’ll be curious to see how much Iowa will improve in the Tax Foundation’s rankings if the proposed flat tax gets approved.

 

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When I wrote about the 2018 edition of Freedom in the 50 States, Florida ranked as the nation’s most libertarian state.

In the 2021 version, New Hampshire takes the top spot (reclaiming the lead it had back in 2016).

Here’s a map showing the 10 best and 10 worst states. One obvious takeaway is that New Hampshire deserves extra praise because it is in a region where there seems to be a general disdain for economic and personal liberty.

And here’s a table showing how all the states rank.

As you can see, Florida is still a very good state.

Indeed, Florida is getting better over time. All that happened in the new edition of Freedom in the 50 States is that New Hampshire got better even faster.

This seems to be a pattern.

You can see from Figure 9 that the best states have been getting better over the past 10 years while the worst states are stagnating.

If you want some background on the publication, here’s how the authors (Will Ruger and Jason Sorens) describe their index.

…the 2021 edition examines state and local government intervention across a wide range of policy categories—from taxation to debt, from eminent domain laws to occupational licensing, and from drug policy to educational choice.We…strive to make it the most comprehensive and definitive source for economic freedom data on the American states.Although the United States has made great strides toward respecting each individual’s rights regardless of race, sex, age, or sexual preference, some individuals face growing threats to their interests in some jurisdictions. Those facing more limits today include smokers, builders and buyers of affordable housing, aspiring professionals wanting to ply a trade without paying onerous examination and education costs, and less-skilled workers priced out of the market by minimum-wage laws. Moreover, although the rights of some have increased significantly in certain areas, for the average American, freedom has declined generally because of federal policy that includes encroachment on policies that states controlled 20 years ago.

For more information, here’s how the states rank for economic freedom.

And here are the rankings for personal freedom.

Let’s look at the some other tables.

Since I’m most interested in fiscal policy, I’m reflexively drawn to Table 7. Kudos to Florida, Tennessee, New Hampshire, and South Dakota (the absence of a state income tax really helps). And I’m surprised to see Massachusetts in the top 10 (it helps to a have a flat tax).

For what it’s worth, Hawaii really stinks. And I’m not surprised to see New York next to last.

Here’s a look at how states have changed since 2000.

No big surprises, though it’s interesting to note that North Dakota (which was ranked #1 back in 2013) has suffered a relative decline (now ranked #15) simply because its improvement has been rather modest compared to the big improvements in other states.

P.S. For those interested in methodological issues, here’s a look at the formula used to determine which states have the most freedom and least freedom.

P.P.S. If you look at the weighting for personal freedom, you’ll find that educational freedom is 2 percent of a state’s score. Given the importance of school choice (for both individual education outcomes and national economic competitiveness), I wonder if that variable is insufficiently appreciated.

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Yesterday’s column included a map showing which states gained and lost the most population over the past year.

I speculated that some of America’s internal migration was driven by differences in tax policy.

So it’s appropriate today that I share this map from the Tax Foundation’s annual State Business Tax Climate Index, showing Wyoming, South Dakota, Alaska, and Florida with the best scores and Connecticut, California, New York, and New Jersey with the worst scores.

Comparing today’s map with yesterday’s map, I immediately noticed that two states losing a lot of people – New York and California – also are states that have very bad tax systems.

And if you examine other states, you’ll confirm that there’s a relationship between tax policy and people “voting with their feet.”

Does that mean taxes are the only thing that matters? Of course not.

But as Janelle Cammenga and Jared Walczak explain in their report, they definitely have an effect on where money gets invested and where jobs get created.

Taxation is inevitable, but the specifics of a state’s tax structure matter greatly. The measure of total taxes paid is relevant, but other elements of a state tax system can also enhance or harm the competitiveness of a state’s business environment. …all types of businesses, small and large, tending to locate where they have the greatest competitive advantage. The evidence shows that states with the best tax systems will be the most competitive at attracting new businesses and most effective at generating economic and employment growth. …State lawmakers are right to be concerned about how their states rank in the global competition for jobs and capital, but they need to be more concerned with companies moving from Detroit, Michigan, to Dayton, Ohio, than from Detroit to New Delhi, India. …Tax competition is an unpleasant reality for state revenue and budget officials, but it is an effective restraint on state and local taxes.

One of the more interesting parts of the report is that you get to see where states rank when considering different types of taxes.

Here’s Table 1, which has the overall ranking in the first column, followed by the rankings for the main revenue sources for states.

If you read the report’s methodology, you’ll notice that there are different weights.

The worst tax (assuming a state wants a competitive system) is the personal income tax, followed by the sales tax and corporate income tax.

No state ranks in the top 10 for all five categories, though Florida, North Carolina, and Utah have relatively good scores across the board.

P.S. One important caveat is that the report does not list energy severance taxes, which are major sources of revenue for states such as Alaska and Wyoming. To be sure, those taxes that largely are borne by out-of-state consumers, so there’s a reason for the omission. Nonetheless, those taxes enable excessive government spending, which is why I think South Dakota and Florida actually have the nation’s best fiscal systems.

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I’ve written many times about how Americans are moving from high-tax states to low-tax states.

Now we have even more evidence because the Census Bureau has issued its annual report on state population changes, along with this accompanying map.

You don’t need to be an expert in map reading to see that California, Illinois, and New York are losing people at the fastest rate (orange states).

Likewise, the states gaining population at the fastest rate (purple states) include Texas.

This chart from the Wall Street Journal shows the biggest changes, as measured by the number of people moving in and out.

To be sure, taxes are not the only factor that drive internal migration.

But it’s also clear that people tend to move to lower-tax states, either because they overtly want to keep more of their money, or because they are attracted to the job opportunities that tend to be more plentiful where taxes are lower.

As you might expect, the coverage from Fox News highlights the fact that people are leaving blue states and moving to red states.

Between 2020 and 2021, the country has seen the lowest population growth since its founding, at only a 0.1% increase, but the biggest declines have occurred in Washington, D.C., and Democrat-led states, according to a report Tuesday by the Census Bureau. …New York with a 1.6% decline, Illinois with a 0.9% decline, and Hawaii and California that both saw a 0.7% decline. Meanwhile, the states that saw the biggest increase in population growth were Republican-run states, starting with Idaho at a 2.9% increase, followed by Utah with 1.7%, Montana with 1.7%, Arizona with 1.4% and South Carolina with 1.2%. …Florida and Texas, each saw a population growth of 1%.

Citing a different report, he Wall Street Journal opined a few days ago about the implications of migration for Illinois.

The Land of Lincoln is one of only three states, including West Virginia and Mississippi, to have lost population since 2010. But its population over age 55 has grown as Baby Boomers have aged. …Illinois is losing young people while Florida is gaining them. State development specialist Zach Kennedy notes that “the U.S. population actually grew in the prime working age, young adult age cohorts, 25 to 29, 30 to 34 and 35 to 39 year olds.” Illinois was among the few states to see a decline in these age cohorts. …“Only New Jersey lost more college-aged individuals out of state who never returned,” Mr. Kennedy says. Hmmm. What do the two have in common? …a shrinking population of prime-age working people and children means a smaller tax base will have to support growing retirement liabilities. Folks who stick around will have to pay higher and higher taxes. …each Illinois household on average is on the hook for $110,000 in government-worker retirement debt, up from $90,000 in 2019. …The per-household pension burdens in Iowa and Wisconsin were $3,500 and $3,200, respectively. Both states have gained young people. State and local government in Illinois is run by public-worker unions, and people are fleeing the economic and fiscal consequences.

The most important sentence in the preceding excerpt points out that “Folks who stick around will have to pay higher and higher taxes.”

And that will encourage even more of them to leave, which leads to even-further pressure for higher taxes on the chumps who remain.

Needless to say, that won’t end well, for Illinois or other blue states. Either they go bankrupt or future politicians do a big blue-state bailout.

P.S. This helps to explain why curtailing the federal tax code’s subsidy for excessive state and local tax burdens was so important.

P.P.S. This is also why federalism is both good politics and good policy.

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Motivated in part by an excellent graphic that I shared in 2016, I put together a five-column ranking of state personal income tax systems in 2018.

Given some changes that have since occurred, it’s time for a new version. The first two columns are self explanatory and columns 3 and 5 are based on whether the top tax rate on households is less than 5 percent (“Low Rate”) or more than 8 percent (“Class Warfare”).

Column 4, needless to say, is for states where the top tax rate in between 5-8 percent.

The good news is that the above table is better than the one I created in 2018. Thanks to tax competition between states, there have been some improvements in tax policy.

I recently wrote about Louisiana’s shift in the right direction.

Now we have some good news from the Tarheel state. The Wall Street Journal opined today about a new tax reform in North Carolina.

The deal phases out the state’s 2.5% corporate income tax between 2025 and 2031. …The deal also cuts the state’s flat 5.25% personal income tax rate in stages to 3.99% by July 1, 2027. …North Carolina ranks tenth on the Tax Foundation’s 2021 state business tax climate index, and these reforms will make it even more competitive. …North Carolina has an unreserved cash balance of $8.55 billion, and legislators are wisely returning some of it to taxpayers.

What’s especially noteworthy is that North Carolina has been moving in the right direction for almost 10 years.

P.S. Arizona almost moved from column 3 to column 5, but that big decline was averted.

P.P.S. There are efforts in Mississippi and Nebraska to get rid of state income taxes.

P.P.P.S. Kansas tried for a big improvement a few years ago, but ultimately settled for a modest improvement.

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Immediately after election day in early November, I applauded voters in the (very blue) state of Washington. They wisely expressed their opposition to a plan by state politicians to impose a capital gains tax.

And it wasn’t even close. Voters said no by a landslide margin in a state that went heavily for Biden.

Today, we’re going to look at more good news from a statewide initiative.

Voters in Louisiana last Saturday had a chance to vote for some pro-growth tax reform. And, as reported by KPVI, they made a wise choice.

Louisiana voters approved a constitutional amendment that decreases the maximum individual income tax rate from 6% to 4.75% beginning next year. …fifty-four percent of voters agreed to Amendment 2, which affects taxpayers making more than $50,000 and couples making more than $100,000 annually. …The free market Pelican Institute also supported Amendment 2. “For too long Louisiana has been lagging behind our neighbors, but the people of Louisiana voted to start our comeback story by passing amendment 2 to simplify our tax code and lower our income tax rates to the lowest in the Southeast of states that levy the tax,” Pelican Institute CEO Daniel Erspamer said in a statement.

The good news gets even better.

Voters imposed a cap on income tax rates, with a maximum of 4.75 percent.

But the legislature is putting the rate down to 4.25, as noted by the Tax Foundation.

Let’s close by looking at some excerpts from an editorial by the Wall Street Journal.

…voters on Saturday approved a constitutional amendment that will reduce corporate and individual income tax rates while simplifying the code. …The tax reform, approved with 54% of the vote, eliminates the deductibility for federal taxes while reducing the top income tax rate on individuals making more than $50,000 to 4.25% from 6%. Rates will also decline for lower earners. The current five corporate tax brackets would be consolidated into three with the top rate falling to 7.5% from 8%. Most Louisianans will get a small net tax cut, and the implementing legislation includes triggers that would reduce rates more if revenues meet growth goals.

For what it’s worth, allowing state deductibility of federal taxes is almost as misguided as federal deductibility of state and local taxes.

So Louisiana voters opted for a win-win situation of lower rates and getting rid of a loophole.

P.S. In a payoff to their wealthy constituents (and to make life easier for profligate governors, state lawmakers, and local officials), Democrats in Congress are pushing to re-create a big deduction for state and local tax payments.

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There’s a political party in the United States – the Democrats – that represents rich people and it is trying very hard to cut taxes for those rich people.

Since I don’t resent rich people (indeed, I applaud them if they earn their money honestly), I generally want lower taxes for upper-income taxpayers. But I don’t want special tax breaks for rich people. Instead, I want to cut their taxes in ways that promote greater national prosperity so that I’ll benefit as well.

Sadly, those aren’t the options the Democrats are choosing.

They are putting all their energy into a dramatic expansion of the state and local tax deduction. This is the tax break that rich people get when they use state and local tax payments to reduce the amount of taxable income they report to the IRS.

It was curtailed as part of the 2017 tax law and now Democrats want to expand it.

The restored tax break would be available to everyone, they say, but let’s look at who really benefits.

The Committee for a Responsible Federal Budget is a middle-of-the-road group, and it points out that more only 2.5 percent of the tax cut would go to people making less than $100K per year.

The Tax Policy Center is a left-of-center organization and it also points out that expanding the deduction for state and local taxes means a windfall for the rich.

Here’s TPC’s chart showing that almost all the gains go to those in the top quintile.

While Democrats in Congress are pushing this big tax cut for the rich, some folks on the left are not very happy about what’s happening.

I often disagree with Catherine Rampell of the Washington Post, but she makes some excellent points in her recent column on the SALT deduction.

Wrong. A disaster. Obscene. These are among the ways liberal budget wonks have described Democrats’ determination to give a huge windfall to the rich by repealing the cap on state and local tax (SALT) deductions. …Households making $1 million or more a year would receive roughly half the benefit of this policy, according to estimates from the Tax Policy Center. About 70 percent of the benefit would go to households making at least $500,000. …Nearly every millionaire (93 percent)…would get a tax cut, with an average size of $48,000. …As a result, the top 5 percent of households would still likely see their taxes go down on net, after accounting for all tax provisions in the budget bill.

The New York Times made similar points about Democrats in an editorial earlier this year.

…the party is flirting with a major change in tax policy that would allow the wealthiest Americans to pay lower taxes. …Proponents of an unlimited SALT deduction say they are seeking to help middle-class taxpayers. If so, they should go back to the drawing board. The top 20 percent of American households, ranked by income, would receive 96 percent of the benefits of the change… The primary beneficiaries would be an even smaller group of the very wealthiest Americans. The 1 percent of households with the highest incomes would receive 54 percent of the benefit, on average paying about $36,000 less per year in federal income taxes.

Honest folks on the left aren’t just upset that congressional Democrats are pushing a big tax cut for rich people.

They’re also upset that this big tax cut is crowding out some other priorities for the left – such as additional spending.

This tweet from Jason Furman (a former top economist for Obama) captures this sentiment.

The bottom line is that the most important constituency for many elected Democrats is not poor people.

It’s rich people and the politicians at the state and local level who represent those rich people.

I’ll close by observing that I don’t want more spending and I also don’t want a special tax break that subsidizes bad policy by state and local politicians, so I’m  obviously not in full agreement with Mr. Furman.

So the best result is for Biden’s entire agenda to implode. That would be a win for American taxpayers, a win for the American economy, and a win for long-suffering residents of blue states.

P.S. Yes, resentment against success motivates many people on the left, but elected Democrats are not the same as left-wing activists.

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To finance a bigger welfare state and create more dependency, President Biden and his congressional allies have been contemplating all sorts of tax increases.

The common theme is “soak the rich.” Our friends on the left seem to think class-warfare taxation is politically popular, and it’s easy to understand their political calculus – win votes by pillaging a tiny group and distributing goodies to a much bigger group.

But if that’s the case, they may want to look at the results of a referendum that was decided earlier this week. It took place in the blue state of Washington, where voters had the chance to register their approval or disapproval of a capital gains tax imposed earlier in the year by the state’s politicians.

Here are the official results, which show a landslide rejection of the class-warfare levy. And it happened in a state that Biden won by nearly 20 percentage points.

Now for the bad news.

The referendum does not repeal the capital gains tax. It’s simply an “advisory vote.”

If you want to know more details, Jared Walczak wrote about the issue last month for the Tax Foundation.

On May 4th, Gov. Jay Inslee (D) signed legislation creating a 7 percent capital gains tax, to take effect next year. On November 2nd, Washington lawmakers will learn what voters think about it. Although the ballot measure asking voters to recommend on retaining or repealing the new tax is purely advisory, this gauge of voter sentiment could be particularly illuminating as Washington barrels forward on the implementation of a highly volatile, constitutionally suspect tax that breaches the state’s historic barrier against income taxation. …Legal challenges to the tax are already pending and may ultimately do more to stop it in its tracks than can a nonbinding advisory vote. Nevertheless, the fate of Advisory Question 37 is an important one, not only because the capital gains tax itself would be economically harmful, or because it shows an irreverence for the state constitution, a concern in its own right. It’s also important because if voters signal their opposition to taxing this specific class of income, that sends a strong message that they are decidedly uninterested in efforts to scrap the state’s ban on a broader income tax.

Well, the voters did send a “strong message” that they want to preserve the state’s zero-income-tax status.

Whether the courts listen (or, more important, whether they uphold the state’s constitution) is yet to be determined.

For purposes of today’s column, however, I’ll simply observe that the election results may have an impact on whether Biden’s awful fiscal proposals get enacted.

Most observers are focused on the upset victory for Republicans in Virginia and the huge vote gains for the GOP in New Jersey. And I won’t be upset if those remarkable election results lead my Democratic friends in DC to back away from Biden’s big-government agenda.

But I think what happened in the state of Washington also indicates that voters don’t want big government, even when politicians tell them “the rich” will pick up the tab. Maybe, just maybe, ordinary people realize that they’ll be collateral damage if we make the United States more like Europe.

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I wrote last month about an encouraging wave of tax cuts at the state level.

I’m particularly impressed by the tax-cutting plan in Arizona, which cleverly reversed a class-warfare scheme designed to enrich teacher unions.

Indeed, I’m a big fan of federalism in large part because good fiscal policy is more likely when state and local governments are forced to compete for jobs and investment.

People can “vote with their feet” by moving from high-tax jurisdictions to low-tax jurisdictions, and politicians are less likely to misbehave when they realize taxpayers can escape.

But “less likely to misbehave” is not the same as “won’t misbehave.”

Notwithstanding the negative consequences, some jurisdictions are contemplating tax increases.

There’s also a plan for a class-warfare tax increase in Washington, DC.

I’m not referring to President Biden’s destructive tax plan (which you can read about here, here, here, and here). Instead, today’s column will focus on the tax increase being considered by the city’s local government.

Here are some excerpt from a report in the Washington Post.

An increasingly left-leaning D.C. Council voted…to raise income taxes on wealthy residents — a victory for advocates seeking tens of millions of dollars to spend…, but a puzzlement to others who saw no need for a tax increase in a year the city is flush with federal grant money. …the 2022 budget…includes generous spending on a long list of programs, mostly funded by the federal grants as well as other sources of local revenue. …The authors of the tax increase proposal…say that wealthy residents who were not financially hurt by the pandemic can afford to pay more.

To see which taxpayers are being penalized, here’s an excerpt from the Tax Foundation’s report on the proposed tax hike.

Interestingly, despite its left-leaning orientation, the Washington Post editorialized against the tax hike.

The council is now intent on ramming through a tax increase on wealthy residents that is driven more by ideology than any need for revenue or sound fiscal strategy. …as opponents of the tax increase pointed out, the District is flush with cash — about $3.2 billion in federal payments and grants, with next year’s local revenue projected to be $162 million more than pre-pandemic times. The proposed $17.5 billion budget already reflects a growth in spending of 3.9 percent over the historically high spending in the current year. …the council’s slapdash approach could have troubling consequences. The District’s tax rates on income and commercial property are already the highest in the region. …states such as Illinois should serve as a cautionary tale: Its high taxes have driven residents and businesses to other states. It’s not hard to imagine that someone making over $1 million — 0.7 percent of D.C. taxpayers, who pay 23.1 percent of the city’s income taxes — might find it more worthwhile to live in Arlington and pay one-third as much in taxes. What then happens…?

This is a remarkable editorial.

Indeed, it sounds like I could have been the author.

  • It highlights excessive growth of government.
  • It highlights how the rich pay the lion’s share of tax.
  • It highlights tax migration across borders.
  • It highlights jurisdictional tax competition.

The difference between me and the Washington Post, though, is that I’m intellectually consistent.

Unlike the editors of that newspaper, I apply the same arguments when analyzing national tax policy as well.

P.S. While the D.C. Council’s plan is very bad tax policy, part of me will be amused if it gets enacted. That’s because Washington is filled with lobbyists, bureaucrats, contractors, and other insiders who get undeserved riches because they have their snouts buried in the federal trough.

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I’ve been asked why I periodically mock politicians. The simple answer is that they often deserve our scorn.

It’s not that they’re evil or bad people, but their incentive structure generally leads them to make shallow, short-run, and self-serving decisions.

Such as setting tax rates so high that they even backfire on politicians (i.e., by discouraging economic activity and thus producing less revenue).

It looks like we may have a new example of this phenomenon.

In an article for the Las Vegas Review-Journal, Richard Velotta reports on Chicago’s bungled attempt to attract a big-name casino.

If everything had gone according to plan, we would all be buzzing this week about which company would have the best opportunity to build a casino resort in Chicago. But it hasn’t gone according to plan. …companies have stated that they won’t be bidding. Four of the largest Strip operators — MGM Resorts International, Las Vegas Sands Corp., Wynn Resorts Ltd. and Caesars Entertainment Inc. — have indicated they have no plans to bid on Chicago. …The biggest issue for Las Vegas operators looking at Chicago is the tax rate Illinois would impose on gross gaming revenue from the Chicago resort — 40 percent. By comparison, the maximum rate in Nevada is 6.75 percent.

I guess we shouldn’t be surprised that Illinois politicians would over-tax something.

But I’m amazed they thought they could impose a tax six times higher than the one in Nevada without any negative consequences.

No wonder the big-name casinos aren’t submitting bids. After all, their job is to generate revenue for shareholders, not loot for politicians.

Though there is a silver lining to this dark cloud.

As mentioned in the story, Illinois politicians apparently did realize it wouldn’t work to have a tax rate more than ten times higher than the one in Nevada.

At one time, Illinois floated a tax rate of around 70 percent, but gaming companies persuaded the Illinois Legislature to modify that.

How generous of Illinois politicians to forgo a 70 percent tax rate!

Reminds me of the former French president who “mercifully” chose to limit personal taxes to 80 percent of household income.

P.S. There is a compelling case that Chicago is America’s most poorly governed city. But that’s hard to decide because there’s strong competition from places such as New York, Seattle, Minneapolis, Detroit, and San Francisco.

P.P.S. In this case, though, it’s a state law that is causing the problem. So we should ask whether Illinois is America’s most poorly governed state. There’s certainly evidence for that claim, but New York, California, and New Jersey also would be in the running.

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The best news of 2021 almost surely is the big expansion of school choice in several states.

That’s a great development, especially for poor and minority families.

But there’s another positive trend at the state level. As indicated by this map from the Tax Foundation, tax rates have been reduced in several jurisdictions.

I’ve already written about Arizona’s very attractive tax reform, though I also acknowledged that the new law mostly stops the tax system from getting worse (because of a bad 2020 referendum result).

But stopping something bad is an achievement, regardless.

What about other states? The Tax Foundation’s article has all the details you could possibly want, including phase-in times and presence (in some states) of revenue triggers.

For purposes of today’s column, let’s simply focus on what’s happening to top tax rates. Here’s a table with the key results, ranked by the size of the rate reduction.

Kudos to Arizona, of course, but Iowa and Louisiana also deserve praise for significantly dropping their top tax rates.

As these states move in the right direction, keep in mind that some states are shifting (or trying to shift) in the wrong direction.

And bigger differences between sensible states and class-warfare states will increase interstate tax migration – with predictable political consequences.

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The best referendum result of 2020 (indeed, the best policy development of the year) was when the people of Illinois voted to preserve their flat tax, thus delivering a crushing defeat to the Prairie State’s hypocritical governor, J.B. Pritzker.

The worst referendum result of 2020 was when the people of Arizona voted for a class-warfare tax scheme that boosted the state’s top tax rate from 4.5 percent to 8 percent.

In one fell swoop, Arizona became a high-tax state for investors, entrepreneurs, innovators, and business owners. That was a very dumb choice, especially since there are zero-income tax states in the region (Nevada, Texas, and Wyoming), as well as two flat-tax states (Utah and Colorado).

You can see Arizona’s problem in this map from the Tax Foundation. It’s great to be grey and good to be yellow, but bad to be orange (like Arizona), red, or maroon.

That’s the bad news.

The good news is that lawmakers in have just approved a plan that will significantly lower tax rates and restore the state’s competitiveness.

The Wall Street Journal opined this morning about this positive development.

Arizona currently taxes income under a progressive rate structure, starting at 2.59% up to 4.5%. The ballot last November carried an initiative to add a 3.5% surtax on earnings above $250,000 for single filers. It narrowly passed, meaning the combined top rate was set to hit 8%, higher than all of Arizona’s neighbors except California. …Mr. Ducey’s budget will cut rates for all taxpayers. The Legislature can’t repeal the voter-approved surtax, so above the 2.5% flat rate, there will still be a second bracket on income over $250,000. But the budget also has a provision adjusting the flat tax downward for those Arizonans, so no one will pay a top rate above 4.5%. …the same as today. …No Arizonan will have to pay the threatened 8% rate, since the provisions forestalling it are immediate. …“Every Arizonan—no matter how much they make—wins with this legislation,” Mr. Ducey said. “It will protect small businesses from a devastating 77 percent tax increase…and it will help our state stay competitive so we can continue to attract good-paying jobs.” That’s worth celebrating.

A story from the Associated Press gave the development a much more negative spin.

After slashing $1.9 billion in income taxes mainly benefiting upper-income taxpayers and shielding them from higher taxes approved by voters in an initiative last year, the Republican-controlled House returned Friday and passed more legislation targeting Proposition 208. The House approved the creation of a new tax category for small business, trusts and estates that will eliminate even more of the money that the measure approved by voters in November was designed to raise for schools. The proposal passed despite unified opposition from minority Democrats. …The governor has expressed disdain for the voter-approved tax, saying it would hurt the state’s economy and vowing in March to see it gutted either though Legislation or the courts. …The budget-approved tax cuts set a flat 2.5% tax on all income levels that will be phased in over several years once revenue projections are met, with those subject to the new education tax paying 4.5% at most.

If nothing else, an amusing example of bias from AP.

I have two modest contributions to this discussion.

First, it’s not accurate to say that Arizona adopted a flat tax. Maybe I’m old fashioned, but a flat tax has to have only one rate. Arizona’s reform is praiseworthy, but it doesn’t fulfill that key equality principle.

Second, the main takeaway is not that lawmakers did something good. It’s more accurate to say that they protected the state from something bad.

I’ve updated this 2018 visual to show how the referendum would have pushed Arizona into Column 5, which is the worst category, but the reform keeps the state in column 3.

P.S. North Carolina made the biggest shift in the right direction in recent years, followed by Kentucky, while Kansas flirted with a big improvement and settled for a modest improvement. Meanwhile, Mississippi is thinking about making a huge positive jump.

P.P.S. Since Arizona voters made a bad choice and Arizona lawmakers made a wise choice, this is evidence for Prof. Garett Jones’ hypothesis that too much democracy is a bad thing.

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The bad news is that federalism has declined in the United States as politicians in Washington have expanded the size and scope of the national government.

The good news is that some federalism still exists and this means Americans have some ability to choose the type of government they prefer by “voting with their feet.”

  1. They can choose states that tax a lot and spend a lot.
  2. They can choose states with lower fiscal burdens.

You won’t be surprised to learn that people generally prefer option #2.

Researchers have found a significant correlation between state fiscal policy and migration patterns.

And it’s still happening.

In a column for the Wall Street Journal a few days ago, Allysia Finley and Kate LaVoie discuss some research based on IRS data about taxpayer migration patterns.

Here’s some of what they wrote.

New IRS data compiled by research outfit Wirepoints illustrate the flight from high- to low-tax states. …Retirees in the Midwest and Northeast are flocking to sunnier climes. But notably, states with no income tax (Florida, Nevada, Tennessee and Wyoming) made up four of the 10 states with the largest income gains. On the other hand, five of the 10 states with the greatest income losses (NY, Connecticut, New Jersey, Minnesota, California) ranked among the top 10 states with the highest top marginal income tax rates. …Florida gained a whopping $17.7 billion in AGI including $3.4 billion from New York, $1.2 billion from California, $1.9 billion from Illinois, $1.7 billion from New Jersey and $1 billion from Connecticut. California, on the other hand, lost $8.8 billion including $1.6 billion to Texas, $1.5 billion to Nevada, $1.2 billion to Arizona and $700 million to Washington.

Here’s a very informative visual, showing the share of income that either left a state (top half of the chart) or entered a state (bottom half of the chart).

Our friends on the left say that this data merely shows that retirees move to states with nicer climates.

That is surely a partial explanation, but it doesn’t explain why California – the state with the nation’s best climate – is losing people and businesses.

Heck, I even have a seven-part series (March 2010February 2013April 2013October 2018June 2019, December 2020, and February 2021) on the exodus from California to Texas.

Let’s return to the Finley-LaVoie column, because there’s some additional data that deserves attention. They point out that states with better policy are big net winners when you look at the average income of migrants.

The average taxpayer who moved to Florida from the other 49 states had an AGI of $110,000… By contrast, the average taxpayer who left Florida had an AGI of just $66,000. In sum, high-tax states aren’t just losing more taxpayers—they are losing higher-income ones. Similarly, low and no income states are generally gaining more taxpayers who also earn more. …When blue states lose high earners, their tax base shrinks, but their cost base continues to grow due to rich government employee pay, pensions and other benefits. …The result is that low-tax states are getting richer while those that impose higher taxes are getting poorer.

As you can see, Florida is a big beneficiary.

And I shared data a few years ago showing that states such as Illinois are big net losers.

Let’s conclude by asking why some politicians, such as the hypocritical governor of Illinois, don’t care when they’re on the losing side of these trends?

I don’t actually know what they’re thinking, of course, but I suspect the answer has something to do with the fact that departing taxpayers probably are more libertarian and conservative. So if you’re a big-spending politician, you probably are not very upset when migration patterns mean your state becomes more left-leaning over time.

That’s a smart political approach.

Until, of course, those states no longer have enough productive people to finance big government.

In other words, every government is limited by Margaret Thatcher’s famous warning.

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Last year, I compared the economic performance of red states and blue states.

My big takeaway from that column is that we should pay attention to the data on internal migration. More specifically, there’s a reason why Americans have been moving from high-tax states to low-tax states.

Today’s let’s follow up on that discussion.

Today’s Wall Street Journal has an editorial on the gap between blue states and red states. This accompanying illustration shows that there is a clear relationship between joblessness and the degree to which states pursue big-government policies.

And here’s how the WSJ explained the big differences.

The unemployment rate in April nationwide was 6.1%, but this obscures giant variations in the states. With some exceptions, those run by Democrats such as California (8.3%) and New York (8.2%) continued to suffer significantly higher unemployment than those led by Republicans such as South Dakota (2.8%) and Montana (3.7%). It’s rare to see differences that are so stark based on party control in states. But the current partisan differences reflect different policy choices over the length and severity of pandemic lockdowns and now government benefits such as jobless insurance. Nine of the 10 states with the lowest unemployment rates are led by Republicans. The exception is Wisconsin whose Supreme Court last May invalidated Democratic Gov. Tony Evers’s lockdown. …Most states in the Midwest, South and Mountain West aren’t far off their pre-pandemic employment peaks. One obstacle to a faster recovery may be the $300 federal unemployment bonus, which many GOP governors are rejecting. Meantime, states with Democratic governments continue to reward workers for sitting on the couch. The longer that workers stay unemployed, the harder it will be to get them to return to work.

For what it’s worth, I’m more upset about the subsidized unemployment than the differences in lockdown policies, particularly because the former is more indicative of economic illiteracy.

P.S. One of the worst parts of Biden’s waste-filled stimulus plan is that it gave a big bailout for states, based on a formula that actually rewarded them for having bad numbers.

P.P.S. Click here and here if you want to peruse comprehensive measures of state economic policy.

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Tax increases are bad fiscal policy, but that doesn’t necessarily mean that they are politically unpopular.

Indeed, many voices in the establishment press are citing favorable polling data in hopes of creating an aura on inevitably for President Biden’s proposed tax hikes.

That’s a very worrisome prospect. If Biden succeeds, the United States could wind up toppling Canada for the dubious honor of having the world’s highest tax burden on saving and investment.

That would be bad news for American workers.

But are Biden’s media cheerleaders correct? Are tax increases popular?

According to a new scholarly working paper from the Federal Reserve (authored by Andrew C. Chang, Linda R. Cohen, Amihai Glazer, and Urbashee Paul), the answer is no.

At least if we judge politicians by what they do in election years. Here’s part of the study’s abstract.

We use new annual data on gasoline taxes and corporate income taxes from U.S.states to analyze whether politicians avoid tax increases in election years. These data contain 3 useful attributes: (1) when state politicians enact tax laws, (2) when state politicians implement tax laws on consumers and firms, and (3) the size of tax changes. Using a pre-analysis research plan that includes regressions of tax rate changes and tax enactment years on time-to-gubernatorial election year indicators, we find that elections decrease the probability of politicians enacting increases in taxes and reduce the size of implemented tax changes relative to non-election years. We find some evidence that politicians are most likely to enact tax increases right after an election. These election effects are stronger for gasoline taxes than for corporate income taxes and depend on no other political, demographic, or macroeconomic conditions.

For wonkier readers, Figure 7 has some of the major results of their statistical analysis. I’ve highlighted (in red) the most important conclusion of the research.

For regular readers, the main takeaway is that politicians almost always want more tax revenue. That’s what gives them the ability to distribute goodies and buy votes.

But notwithstanding their never-ending hunger to grab more money, they are very likely to reject tax increases in election years. They even reject higher corporate taxes, which are supposed to be popular (at least according to some in the establishment media).

Yet if tax increases were politically popular, we should see the opposite result.

I’ll close with the somewhat depressing observation that these results do not imply that voters want libertarian policy. It’s probably more accurate to say that people want goodies from the government, but they don’t want to pay for them. Politicians simply respond to those preferences (which brings to mind Garett Jones’ hypothesis that we have too much democracy).

Which is how Greece became a basket case. Which is why Italy is in the process of becoming a basket case. And it’s why the United States may not be that far behind (with states such as Illinois serving as early-warning signs).

P.S. The above-cited research should be a reminder of why a no-tax-hike pledge is important. Voters seem to be on the right side on the big-picture question of “Should taxes be higher?”, but if they think tax increases are going to happen, it’s quite likely that they will support the most economically damaging types of class-warfare levies.

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When I ask my left-leaning friends what they think about the flight of investors, entrepreneurs, and business owners from high-tax states, I tend to get three responses.

  1. It isn’t actually happening (these are my friends who apparently don’t know how to read).
  2. It’s happening, but it doesn’t matter (data from the IRS suggests it actually is significant).
  3. It’s happening, but high-tax states will be better off without these selfish and greedy people.

The folks making the third point actually have a decent argument, at least in terms of short-run political outcomes. Democrats rarely have to worry about retaining control of states like California, New York, Illinois, and New Jersey now that many Republican-leaning voters have moved away.

But sometimes short-run benefits are exceeded by long-run costs, and the recent data on congressional redistricting from the Census Bureau is a good example.

As you can see, there’s a continuing shift of political power – as measured by seats in Congress – from blue states to red states.

Patrick Gleason of Americans for Tax Reform explains what this means in a column for Forbes.

Over the past decade Americans have been voting with their feet in favor of states with lower overall tax burdens… As a result, high tax states…are set to lose congressional clout for the next decade, to the benefit of low tax states… the seven states that will lose congressional seats due to stagnant population growth have higher top income tax rates and greater overall tax burdens, on average, than do the six states gaining seats. In fact, the average top personal income tax rate for states losing seats in congress is 6.5%, which is 46% greater than the 4.45% average top income tax rate for states gaining seats.

Some people may want to dismiss Mr. Gleason’s column since he works for a group that supports smaller government.

But you can find the same analysis in this column in the Washington Post by Aaron Blake.

…what does the new breakdown mean from a partisan perspective? All told, five seats will migrate from blue states to red ones — owing to population shifts from the Rust Belt, the Northeast and California to the South and other portions of the West. Five of the seven seats being added also go to states under complete GOP control of redistricting, with three of seven being taken away coming from states in which Democrats have some measure of control over the maps. …That should help Republicans… The Cook Political Report estimates the shifts are worth about 3.5 seats… As for the electoral college in future presidential elections, …Michigan and Pennsylvania…are states Democrats probably need to win in the near future, meaning it’s probably a bigger loss for them. …If we reran the 2020 electoral college with the new electoral votes by state, Biden’s margin would shrink from 306-232 to 303-235. That seems negligible. But if you overlay the 2000 presidential results — three reapportionments ago — on the current electoral vote totals, George W. Bush’s narrow win with 271 electoral votes becomes a much more decisive win with 290. That gives you a sense where things have trended.

Let’s now return to the hypothesis that tax-motivated migration is playing a role.

Here’s an instructive tweet from Andrew Wilford of the National Taxpayers Union.

I’ll wrap up today’s column by augmenting the data in Mr. Wilford’s tweet.

Because not only are there, on average, lower tax burdens in the states gaining congressional seats, but every one of them has some very desirable feature of its tax code.

To be sure, not all of the state-to-state migration is due to tax policy. There are all sorts of other policies that determine whether a state is an attractive place for people looking to relocate.

And there are other factors (family, climate, etc) that have nothing to do with public policy.

All things considered, however, being a low-tax state means more jobs, growth, and people, at least when compared with being a high-tax state.

P.S. If you’re interested in seeing how states rank in various indices, click here, here, and here.

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The state of New York is an economic disaster area.

  • New York is ranked #50 in the Economic Freedom of North America.
  • New York is ranked #48 in the State Business Tax Climate Index.
  • New York is ranked #50 in the Freedom in the 50 States.
  • New York is next-to-last in measures of inbound migration.
  • New York is ranked #50 in the State Soft Tyranny Index.

The good news is that New York’s politicians seem to be aware of these rankings and are taking steps to change policy.

The bad news is that they apparently want to be in last place in every index, so they’re looking at a giant tax increase.

The Wall Street Journal opined on the potential tax increase yesterday.

…lawmakers in Albany should be shouting welcome home. Instead they’re eyeing big new tax increases that would give the state’s temporary refugees to Florida—or wherever—one more reason to stay away for good. …Here are some of the proposals… Impose graduated rates on millionaires, up to 11.85%. …Since New York City has its own income tax, running to 3.88%, the combined rate would be…a bigger bite than even California’s notorious 13.3% top tax, and don’t forget Uncle Sam’s 37% share. …The squeeze is worse when you add the new taxes President Biden wants. A second factor: In 2017 the federal deduction for state and local taxes was capped at $10,000, so New Yorkers will now really feel the pinch. As E.J. McMahon of the Empire Center for Public Policy writes: “The financial incentive for high earners to move themselves and their businesses from New York to states with low or no income taxes has never—ever—been higher than it already is.”

The potential deal also would increase the state’s capital gains tax and the state’s death tax, adding two more reasons for entrepreneurs and investors to escape.

Here are some more details from a story in the New York Times by Luis Ferré-Sadurní and .

Gov. Andrew M. Cuomo and New York State legislative leaders were nearing a budget agreement on Monday that would make New York City’s millionaires pay the highest personal income taxes in the nation… Under the proposed new tax rate, the city’s top earners could pay between 13.5 percent to 14.8 percent in state and city taxes, when combined with New York City’s top income tax rate of 3.88 percent — more than the top marginal income tax rate of 13.3 percent in California… Raising taxes on the rich in New York has been a top policy priority of the Democratic Party’s left flank… The business community has warned that raising income taxes could prompt millionaires who have left the state during the pandemic and are working remotely to make their move permanent, damaging the state’s tax base. Currently, the top 2 percent of the state’s highest earners pay about half of the state’s income taxes. …The corporate franchise tax rate would also increase to 7.25 percent from 6.5 percent.

There are two things to keep in mind about this looming tax increase.

That second item is a big reason why so many taxpayers already have escaped New York and moved to states with better tax policy (most notably, Florida).

And even more will move if tax rates are increased, as expected.

Indeed, if the left’s dream agenda is adopted, I wouldn’t be surprised if every successful person left New York. In a column for the Wall Street Journal, Mark Kingdon warns about other tax hikes being considered, especially a wealth tax.

Legislators in Albany are considering two tax bills that could seriously damage the economic well-being and quality of life in New York for many years to come: a wealth tax and a stock transfer tax. …Should New York enact a 2% wealth tax, a wealthy New Yorker could wind up paying a 77% tax on short-term stock market profits. And that’s a conservative estimate: It assumes that stocks return 9% a year. If the return is 4.4% or less, the tax would be more than 100%. …65,000 families pay half of the city’s income taxes, and they won’t stay if the taxes become unreasonable… The trickle of wealthy émigrés out of New York has become a steady stream… It will be a flood if New York enacts a wealth tax with an associated tax on unrealized gains, which would lower, not raise, tax revenues, as those who leave take with them jobs and related services, such as legal and accounting. …The geese who have laid golden eggs for years see what is happening in Albany, and they’ll fly south to avoid being carved up.

The good news – at least relatively speaking – is that a wealth tax is highly unlikely.

But that a rather small silver lining on a very big dark cloud. The tax increases that will happen are more than enough to make the state even more hostile to private sector growth.

I’ll close with a few observations.

There are a few states that can get away with higher-than-average taxes because of special considerations. California, for instance, has climate and scenery. In the case of New York, it can get away with some bad policy because some people think of New York City as a one-of-a-kind place. But there’s a limit to how much those factors can be exploited, as both California and New York are now learning.

What politicians don’t realize (or don’t care about) is that people look at a range of factors when deciding where to live. This is especially true for successful entrepreneurs, investors, and business owners, who have both resources and knowledge to assess the costs and benefits of different locations. The problem for New York is that it looks bad on almost all policy metrics.

If the tax increases is enacted, expect to see a significant drop in taxable income as upper-income taxpayers either leave the state or figure out other ways of protecting their income. I don’t know if the state will be on the downward-sloping portion of the Laffer Curve, but it’s safe to assume that revenues over time will fall far short of projections. And it’s very safe to assume that the economic damage will easily offset any revenues that are collected.

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To begin the seventh edition of our series comparing policy in Texas and California (previous entries in March 2010, February 2013, April 2013, October 2018, June 2019, and December 2020), here’s a video from Prager University.

There will be a lot of information in today’s column, so if you’re pressed for time, here are three sentences that tell you what you need to know.

California has all sorts of natural advantages over Texas, especially endless sunshine and beautiful topography.

Texas has better government policy than California, most notably in areas such as taxation and regulation.

Since people are moving from the Golden State to the Lone Star State, public policy seems to matter more than natural beauty.

Now let’s look at a bunch of evidence to support those three sentences.

We’ll start with an article by Joel Kotkin of Chapman University.

If one were to explore the most blessed places on earth, California, my home for a half century, would surely be up there. …its salubrious climate, spectacular scenery, vast natural resources… President Biden recently suggested that he wants to “make America California again”. Yet…he should consider whether the California model may be better seen as a cautionary tale than a roadmap to a better future… California now suffers the highest cost-adjusted poverty rate in the country, and the widest gap between middle and upper-middle income earners. …the state has slowly morphed into a low wage economy. Over the past decade, 80% of the state’s jobs have paid under the median wage — half of which are paid less than $40,000…minorities do better today outside of California, enjoying far higher adjusted incomes and rates of homeownership in places like Atlanta and Dallas than in San Francisco and Los Angeles. Almost one-third of Hispanics, the state’s largest ethnic group, subsist below the poverty line, compared with 21% outside the state. …progressive…policies have not brought about greater racial harmony, enhanced upward mobility and widely based economic growth.

Next we have some business news from the San Francisco Chronicle.

Business leaders fear tech giant Oracle’s recent announcement that it is leaving the Bay Area for Austin, Texas, will lead to more exits unless some fundamental political and economic changes are made to keep the region attractive and competitive. “This is something that we have been warning people about for several years. California is not business friendly, we should be honest about it,” said Kenneth Rosen, chairman of the UC Berkeley Fisher Center for Real Estate and Urban Economics. Bay Area Council President Jim Wunderman said… “From consulting companies to tax lawyers to bankers and commercial real estate firms, every person I talk with who provides services to big Bay Area corporations are telling me that their clients are strategizing about leaving…” Charles Schwab, McKesson and Hewlett Packard Enterprise have all exited the high-cost, high-tax, high-regulation Bay Area for a less-expensive, less-regulated and business-friendlier political climate. All of them rode off to Texas. …the pace of the departures appears to be increasing. …A recent online survey of 2,325 California residents, taken between Nov. 4 and Nov. 23 by the Public Policy Institute of California, found 26% of residents have seriously considered moving out of state and that 58% say that the American Dream is harder to achieve in California than elsewhere.

Are California politicians trying to make things better, in hopes of stopping out-migration to places such as Texas?

Not according to this column by Hank Adler in the Wall Street Journal.

California’s Legislature is considering a wealth tax on residents, part-year residents, and any person who spends more than 60 days inside the state’s borders in a single year. Even those who move out of state would continue to be subject to the tax for a decade… Assembly Bill 2088 proposes calculating the wealth tax based on current world-wide net worth each Dec. 31. For part-year and temporary residents, the tax would be proportionate based on their number of days in California. The annual tax would be on current net worth and therefore would include wealth earned, inherited or obtained through gifts or estates long before and long after leaving the state. …The authors of the bill estimate the wealth tax will provide Sacramento $7.5 billion in additional revenue every year. Another proposal—to increase the top state income-tax rate to 16.8%—would annually raise another $6.8 billion. Today, California’s wealthiest 1% pay approximately 46% of total state income taxes. …the Legislature looks to the wealthiest Californians to fill funding gaps without considering the constitutionality of the proposals and the ability of people and companies to pick up and leave the state, which news reports suggest they are doing in large numbers. …As of this moment, there are no police roadblocks on the freeways trying to keep moving trucks from leaving California. If A.B. 2088 becomes law, the state may need to consider placing some.

The late (and great) Walter Williams actually joked back in 2012 that California might set up East German-style border checkpoints. Let’s hope satire doesn’t become reality.

But what isn’t satire is that people are fleeing the state (along with other poorly governed jurisdictions).

Simply state, the blue state model of high taxes and big government is not working (just as it isn’t working in countries with high taxes and big government).

Interestingly, even the New York Times recognizes that there is a problem in the state that used to be a role model for folks on the left.

Opining for that outlet at the start of the month, Brett Stephens raised concerns about the Golden State.

…today’s Democratic leaders might look to the very Democratic state of California as a model for America’s future. You remember California: People used to want to move there, start businesses, raise families, live their American dream. These days, not so much. Between July 2019 and July 2020, more people — 135,400 to be precise — left the state than moved in… No. 1 destination: Texas, followed by Arizona, Nevada and Washington. Three of those states have no state income tax.

California, by contrast, has very high taxes. Not just an onerous income tax, but high taxes across the board.

Californians also pay some of the nation’s highest sales tax rates (8.66 percent) and corporate tax rates (8.84 percent), as well as the highest taxes on gasoline (63 cents on a gallon as of January, as compared with 20 cents in Texas).

Sadly, these high taxes don’t translate into good services from government.

The state ranks 21st in the country in terms of spending per public school pupil, but 27th in its K-12 educational outcomes. It ties Oregon for third place among states in terms of its per capita homeless rate. Infrastructure? As of 2019, the state had an estimated $70 billion in deferred maintenance backlog. Debt? The state’s unfunded pension liabilities in 2019 ran north of $1.1 trillion, …or $81,300 per household.

Makes you wonder whether the rest of the nation should copy that model?

Democrats hold both U.S. Senate seats, 42 of its 53 seats in the House, have lopsided majorities in the State Assembly and Senate, run nearly every big city and have controlled the governor’s mansion for a decade. If ever there was a perfect laboratory for liberal governance, this is it. So how do you explain these results? …If California is a vision of the sort of future the Biden administration wants for Americans, expect Americans to demur.

Some might be tempted to dismiss Stephens’ column because he is considered the token conservative at the New York Times.

But Ezra Klein also acknowledges that California has a problem, and nobody will accuse him of being on the right side of the spectrum.

Here’s some of what he wrote in his column earlier this month for the New York Times.

I love California. I was born and raised in Orange County. I was educated in the state’s public schools and graduated from the University of California system… But for that very reason, our failures of governance worry me. California has the highest poverty rate in the nation, when you factor in housing costs, and vies for the top spot in income inequality, too. …but there’s a reason 130,000 more people leave than enter each year. California is dominated by Democrats, but many of the people Democrats claim to care about most can’t afford to live there. …California, as the biggest state in the nation, and one where Democrats hold total control of the government, carries a special burden. If progressivism cannot work here, why should the country believe it can work anywhere else?

Kudos to Klein for admitting problems on his side (just like I praise the few GOPers who criticized Trump’s big-government policies).

But his column definitely had some quirky parts, such as when he wrote that, “There are bright spots in recent years…a deeply progressive plan to tax the wealthy.”

That’s actually a big reason for the state’s decline, not a “bright spot.”

I’m not the only one to recognize the limitations of his column.

Kevin Williamson wrote an entire rebuttal for National Review.

Who but Ezra Klein could survey the wreck left-wing Democrats have made of California and conclude that the state’s problem is its excessive conservatism? …Klein the rhetorician anticipates objections on this front and writes that he is not speaking of “the political conservatism that privatizes Medicare, but the temperamental conservatism that” — see if this formulation sounds at all familiar — “stands athwart change and yells ‘Stop!’” …California progressives have progressive policies and progressive power, and they like it that way. That is the substance of their conservatism. …Klein and others of his ilk like to present themselves as dispassionate pragmatists, enlightened empiricists who only want to do “what works.” …Klein mocks San Francisco for renaming schools (Begone, Abraham Lincoln!) while it has no plan to reopen them, but he cannot quite see that these are two aspects of a single phenomenon. …Klein…must eventually understand that the troubles he identifies in California are baked into the progressive cake. …That has real-world consequences, currently on display in California to such a spectacular degree that even Ezra Klein is able dimly to perceive them. Maybe he’ll learn something.

I especially appreciate this passage since it excoriates rich leftists for putting teacher unions ahead of disadvantaged children.

Intentions do not matter very much, and mere stated intentions matter even less. Klein is blind to that, which is why he is able to write, as though there were something unusual on display: “For all the city’s vaunted progressivism, [San Francisco] has some of the highest private school enrollment numbers in the country.” Rich progressives have always been in favor of school choice and private schools — for themselves. They only oppose choice for poor people, whose interests must for political reasons be subordinated to those of the public-sector unions from which Democrats in cities such as San Francisco derive their power.

Let’s conclude with some levity.

Here’s a meme that contemplates whether California emigrants bring bad voting habits with them.

Though that’s apparently more of a problem in Colorado rather than in Texas.

And here’s some clever humor from Genesius Times.

P.S. My favorite California-themed humor (not counting the state’s elected officials) can be found here, hereherehere, and here.

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If you ask normal people about the biggest thing that happened in 2020, they’ll probably pick coronavirus, though some might say the 2020 election.

But if you ask a policy wonk, you may get a different answer. Especially if we’re allowed to tweak the question a bit and contemplate the most under-appreciated development of 2020.

In which case, my answer would be interstate tax migration.

I’ve been writing about this topic for years, but it seems that there’s been an acceleration. And, as illustrated by this map, people are moving from high-tax states to low-tax states.

The map comes from an article by Scott Sumner of the Mercatus Center, and here’s some of his analysis.

The movement of these industries is toward three states that have one thing in common—no state income tax. …Progressives often discount the supply side effects of tax changes, pointing to examples such as Kansas where tax cuts had little effect. But Kansas…tax cuts were relatively modest. If you are looking for a low tax state on the Great Plains, South Dakota has no state income tax at all. The top rate in Kansas (5.7%) is higher than in Massachusetts (5.0%). That won’t get the job done. …I’m certainly not a rabid supply sider who thinks that tax rates are all important. But a person would have to be pretty blind to ignore the migration of firms from places like New York, New Jersey and California, to lower tax places. …Washington State has no income tax, which is unique for a northern state with a big city. Washington is also home to the two of the three richest people on the planet (the other–Elon Musk–just announced he’s moving from California to Texas.) …Washington is also experiencing rapid population growth, which is also unique for a northern state with a big city. …last year more that half of the US population growth occurred in just two states—Texas and Florida. …Add in Tennessee and Washington and you are at nearly two thirds of the nation’s population growth.

Wow, four states (all with no income tax) accounted for the bulk of America’s population growth. That’s a non-trivial factoid.

And I also think his observations about Kansas are spot on. Yes, the state improved it’s tax system, but it should have been bolder, like North Carolina.

The Washington Examiner recently opined on internal migration and also noted that people are escaping high-tax states.

…the state of Illinois has been a laggard in population growth. It has lost eight congressional districts since the 1950s. But new census estimates show that this decade, something very special has happened. …the land of Lincoln has lost a net 308,000 residents over the last seven years… And Illinois’s rapid shrinkage is occurring even as the United States grew by nearly 7% since the last census. …Illinois is not alone. The same census data point to two other big states that are also driving away residents with similarly impractical, ideologically leftist policies ⁠— California and New York. …New York, as a consequence, has also lost about 42,000 residents in the last decade. Its population peaked in 2015, and in the time since, it has lost about 320,000. A similar phenomenon is occurring in California, …with about 70,000 net residents vanishing in 2020. …residents are actually giving up and abandoning its beautiful, scenic inhabited areas. …the same census numbers show that people are gravitating toward states that have low or no income tax.

The mess in jurisdictions such as New York, California, Illinois, New Jersey, and Connecticut is so severe that I wasn’t sure how to vote in the first-to-bankruptcy poll.

And a recent editorial in the Wall Street Journal echoed these findings.

California’s population shrank for the first time as far back as records go (-69,532). According to a separate state government survey, a net 261,000 residents moved to other states during the period…many large businesses are shifting workforces to other states. …Last year Charles Schwab announced it is relocating its corporate headquarters to the Dallas region from San Francisco. Apple is building a new campus in Austin. Facebook this fall bought REI’s headquarters outside of Seattle. Oracle and Hewlett Packard Enterprise recently announced relocations to Texas. …Over the last decade, Illinois has lost 243,102 in population, about the size of Peoria and Naperville combined. …Democratic states in the Northeast last year lost population, led by New York (-126,355), Connecticut (-9,016) and New Jersey (-8,887). …By raising taxes again and again to pay for generous collective-bargained benefits, public unions are making Democratic states less competitive.

The final sentence is the above excerpt is especially insightful.

Among the states facing fiscal challenges, a common theme is that politicians and bureaucrats have a very cozy and corrupt relationship resulting in absurdly lavish (and unaffordable) compensation levels.

Let’s close with a bit of humor from the great cartoonist, Eric Allie. With all the interstate migration that happened last year, no wonder Santa Claus had some problems.

P.S. I also recommend this Lisa Benson cartoon, this Redpanels cartoon strip, and this Steven Breen Cartoon.

P.P.S. Even though it would be a massive tax cut for the rich, Democrats want to restore the state and local tax deduction. Even if they are successful, though, I suspect that change would only slow down the decline of blue states.

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According to the Fraser Institute’s Economic Freedom of North America, the most economically free jurisdiction in North America used to be the Canadian province of Alberta.

But Alberta then slipped and New Hampshire claimed the top position. And, according to the the 2020 edition of Economic Freedom of North America, the Granite State is still the best place to live.

But since most of my readers are from the United States, let’s focus just on American states, and specifically look at how they rank based on the policies they control.

On this basis, you can see that New Hampshire is in first place, followed by Florida, Virginia, Texas, and Tennessee (if you’re looking for a common thread, four of the five have no state income tax).

Here are some highlights from the Fraser Institute’s summary.

Economic Freedom of North America 2020…measures the extent to which…individual provinces and states were supportive of economic freedom… There are two indices: one that examines provincial/state and municipal/local governments only and another that includes federal governments as well. …The all-government index includes data from Economic Freedom of the World… The top jurisdiction is New Hampshire at 8.16, followed by Florida and Idaho at 8.10 , then Wyoming (8.09) and Utah (8.08). Alberta is the highest ranking Canadian province, tied for 9th place with a score of 8.06. The next highest Canadian province is British Columbia in 27th at 7.98. …The highest-ranked Mexican state is Jalisco with 6.70… The lowest-ranked states in the United States are Delaware at 7.72 in 56th place, following Rhode Island (7.76 in 54th) and New York (7.77 in 53rd).

As I noted above, I think it’s especially instructive to see how jurisdictions compare when looking at the policies they control.

Here’s what the study says about the subnational index.

For the subnational index, Economic Freedom of North America employs 10 variables for the 92 provincial/state governments in Canada, the United States, and Mexico in three areas: 1. Government Spending; 2. Taxes; and 3. Labor Market Freedom. …There is a separate subnational index for each country. In Canada, the most economically free province in 2018 was again Alberta with 6.61, followed by British Columbia with 5.98… The least free by far was Quebec at 2.84… In the United States, the most economically free state was New Hampshire at 7.84, followed by Florida at 7.73. …(Note that since the indexes were calculated separately for each country, the numeric scores on the subnational indices are not directly comparable across countries.) The least-free state was New York at 4.25… In Mexico, the most economically free state was Jalisco at 6.57.

One obvious takeaway is to avoid Quebec and New York.

And almost all of Mexico as well.

One of the many great things about the Fraser Institute is that they are very good at sharing their data.

And, because I was curious to know what states are moving in the right direction and wrong direction, I downloaded the excel file so I could make the relevant calculations.

Here are the numbers, showing the both the overall shift since 1981 as well as the data for 1981-2000 and 2000-2018.

The good news is that every single state has more economic freedom today that it had in 1981. Michigan and Massachusetts enjoyed the biggest increases over the past four decades, though both of them still plenty of room for upward improvement.

Looking at the 1981-2000 and 2000-2018 periods, there was much more reform at the end of last century than there has been at the beginning of this century. So maybe the “Washington Consensus” influenced American states as well as foreign nations.

I realize I’m a dork about such things, but I was especially interested to see that some states (Delaware, Illinois, Maryland, New Jersey, New York, and Colorado) were very good performers in 1981-2000, but fell to the bottom group in 2000-2018.

By contrast, other states (Montana, North Dakota, Washington, and New Mexico) jumped from the bottom 10 to the top 10.

P.S. Texas ranked #1 in 1981, and by a comfortable margin, so even though it was among the bottom-10 performers for 1981-2018, it still ranks #4 overall for good economic policy.

P.P.S. Colorado dropped from #8 in 1981 to #23 in 2018, which may be a sign that the pro-growth impact of TABOR is more than offset the anti-growth impact of all the Californians that have moved to the state.

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I asked a couple of years ago, “How long can California survive big government?”

Based on migration patterns, the answer is “Not much longer.” Simply stated, bad fiscal and regulatory policy have produced a long-run decline for the Golden State. So we shouldn’t be surprised that people are fleeing.

And it appears Californians like escaping to Texas, a state with no personal or corporate income tax.

I’ve written several times about the divergent performance of the two states.

So let’s make today’s column the sixth edition of Texas vs. California.

We’ll start with a column in the Wall Street Journal by Joe Lonsdale, a venture capitalist who explains why he and his company are moving to Texas.

I love California…and have spent most of my adult life in the San Francisco Bay Area, founding technology companies like Palantir and Addepar and investing in many others. In 2011 I founded 8VC, a venture-capital firm that today manages more than $3.6 billion in committed capital. …I am moving myself and dozens of my 8VC colleagues to a new land of opportunity: Texas. The harsh truth is that California has fallen into disrepair. Bad policies discourage business and innovation, stifle opportunity and make life in major cities ugly and unpleasant. …That’s not all. The California government is beholden to public-employee unions and spending is out of control. A broken environmental review process means it takes a decade of paying lawyers to build anything. Legislation makes it impossible for businesses to hire contractors without an exemption—granted by friends in the legislature, as with the music industry, or won by spending hundreds of millions on a referendum, as gig-economy companies with drivers just did. This isn’t how business is done in developed countries. …It’s tragic that California is no longer hospitable to that mission, but beautiful that Texas is. Our job as entrepreneurs and investors is to build the future, and I know of no better place to do so than Texas.

In a report for CNBC, Ari Levy and Lora Kolodny write about Elon Musk’s looming escape to the Lone Star State.

Tesla CEO Elon Musk put his California houses on the market this year while he was sparring with state lawmakers over Covid-19 restrictions. He’s simultaneously been expanding operations in Texas and cozying up to Republican Gov. Greg Abbott. Now, several of his close friends and associates say that Musk has told them he’s planning to move to the Lone Star State. …California, often condemned by the super rich for its high tax rates and stiff regulations, has seen an exodus of notable tech names… In May, as businesses across California were forced to remain closed because of the pandemic, Musk tweeted that he was moving Tesla’s headquarters and future development from California to Texas and Nevada. Getting out of California, with the highest income tax in the country, and into Texas, which has no state income tax, could save Musk billions of dollars.

Meanwhile, Hewlett Packard already has made the move, as reported by the Associated Press.

Tech giant Hewlett Packard Enterprise said it is moving its global headquarters to the Houston area from California, where the company’s roots go back to the founding of Silicon Valley decades ago. …”As we look to the future, our business needs, opportunities for cost savings, and team members’ preferences about the future of work, we are excited to relocate HPE’s headquarters to the Houston region,” CEO Antonio Neri said in a written statement… moving out of Northern California is a loss, at least symbolically, for the tech industry that electronics pioneers William Hewlett and David Packard helped start in a Palo Alto garage in 1939. A plaque outside the home where they worked on their first product, an audio oscillator, calls it the birthplace of Silicon Valley, the “world’s first high-technology region.”

To be sure, the three stories shared above are anecdotes.

But if you look at comprehensive data on both people and income, there’s a very clear pattern. Simply stated, Texas is winning and California is losing.

No, this doesn’t mean Texas is perfect. Or that California is always bad (it’s much better than Texas with regards to asset forfeiture, for instance).

But it’s hard to feel much optimism about the Golden State.

P.S. My favorite California-themed jokes (not counting the state’s elected officials) can be found hereherehere, and here. And here’s some tongue-in-cheek advice for California from the recently departed Walter Williams.

P.P.S. If you prefer comparisons of New York and Florida, click here, here, here, and here.

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When examining state public policy, big jurisdictions such as California, Texas, New York, and Florida get a lot of attention.

But what about Mississippi? It has mediocre scores for overall economic policy.

And the Magnolia State also isn’t winning any prizes when looking specifically at tax policy.

But the state may be about to take a big step in the right direction.

The governor wants to get rid of his state’s progressive income tax and instead join the no-income-tax club.

The Associated Press reports on the proposal.

Mississippi Gov. Tate Reeves said Monday that the state should phase out its individual income tax by 2030 to attract new residents and businesses that could boost economic growth. …Mississippi’s population has grown slowly this year after declining in recent years. Florida, Texas and Tennessee, which do not have an individual income tax, have grown rapidly. “Let’s eliminate the income tax, which is one huge speed bump to long-term economic growth and recovery for Mississippi,” Reeves said.

Analyzing the proposal for the Tax Foundation, Katherine Loughead points out a big logistical challenge.

The income tax currently generates a big chunk of revenues for the state’s budget, so abolition of that levy will require serious spending restraint and/or offsetting tax increases.

Mississippi Governor Tate Reeves (R), in his budget proposal for fiscal year (FY) 2022, has announced his goal of phasing out the state’s income tax by 2030. Mississippi’s income tax currently has three marginal rates of 3 percent, 4 percent, and 5 percent. …Under legislation adopted in 2016, the first marginal rate is already being phased out. …Gov. Reeves’ proposal seeks to build upon the ongoing phaseout of the 3 percent rate by also eliminating the 4 percent rate within five years. Then, subject to revenue availability, the governor hopes to eliminate the 5 percent rate so that, by 2030, Mississippi will join the ranks of the states with no income tax. …Mississippi’s income tax generated nearly 43 percent of the state’s total tax collections in FY 2019, with nearly $1.9 billion coming from the individual income tax and $644 million from the corporate income tax. The state will need to see continued revenue gains over the next decade to phase out the income tax without increasing other taxes. …Even if full income tax repeal is out of reach, however, the state could certainly reduce tax liability, particularly for lower-income residents, by continuing to increase the amount of income that is exempt from taxation, eliminating the first two brackets so a single-rate tax remains, and then reducing the rate below 5 percent.

A flat tax would be a step in the right direction, but state lawmakers should be aggressive and push for total elimination of the income tax. Which probably means the state will need a TABOR-style spending cap to make the numbers work.

The bottom line is that Mississippi is a relatively poor state by American standards (roughly akin to the United Kingdom or New Zealand, for those who prefer international comparisons) and needs bold reforms to catch up to the rest of the nation.

Abolishing the income tax definitely would qualify as a big move. Revisiting the chart from above, which I created in 2018, abolishing the income tax would vault the state to the top quintile of tax policy.

P.S. I also modified the chart to show that Arizona will drop from the middle quintile to the bottom quintile because voters foolishly voted for a class-warfare tax hike earlier this month.

P.P.S. The last southern governor to propose total repeal of the income tax didn’t make any progress.

P.P.P.S. Even though the people of Mississippi are the least likely of any state to read my columns, I hope they soon enjoy the benefits of living in a no-income-tax jurisdiction.

P.P.P.P.S. There’s also a proposal to get rid of the Nebraska state income tax.

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For years, public finance experts have been warning about fiscally irresponsibility by state and local governments.

Many of those governments have been spending too much money and making overly expensive promises to interest groups such as government employees. Combined with the fact that these jurisdictions are driving away taxpayers, this leaves them vulnerable to potential crisis if the economy falters.

Which, of course, is exactly what happened with the coronavirus.

As is so often the case, Washington responded in an imprudent manner. As part of multi-trillion dollar emergency legislation (the CARES Act), Congress directly funneled hundreds of billions of dollars to state and local governments.

That legislation also gave the nation’s central bank, the Federal Reserve, the authority to steer money to those same governments.

Notwithstanding all this generosity, state and local politicians are now asking for even more money. In part, this is a fight over the provisions of a potential new “stimulus” bill from Congress.

But it’s also a battle over the fate of the Federal Reserve’s ability to interfere with the allocation of capital by directing money to state and local governments.

In a report for the New York Times, Jeanna Smialek and explain what’s happening.

A political fight is brewing over whether to extend critical programs that the Federal Reserve rolled out to help keep credit flowing to…municipalities amid the pandemic-induced recession. …Those programs expire on Dec. 31, and it is unclear whether the Trump administration will agree to extend them. The Federal Reserve chair, Jerome H. Powell, and Treasury secretary, Steven Mnuchin, must together decide whether they will continue the programs — including one that buys state and local bonds, another purchasing corporate debt and another that makes loans to small and medium-size businesses. …Mnuchin…has signaled that he would favor ending the one that buys municipal bonds. And he is under growing pressure from Republicans to allow all five of the Treasury-backed programs to sunset. …The financial terms for buying state and local debt…are not generous enough to compete in a market functioning well… Their main purpose has been to reassure investors that the central bank is there as a last-ditch option if conditions worsen.

However, economic conditions have dramatically improved since the coronavirus first hit, so there’s no longer any argument that financial markets are dealing with crisis conditions.

But that doesn’t seem to matter to politicians who want to subsidize bad fiscal policy at the state and local level.

Some Democrats had begun eyeing the municipal program as a backup option in the event that state and local government relief proved hard to pass through Congress. While the program’s terms are unattractive now, they could in theory be sweetened under a Biden administration Treasury Department. …If a coronavirus vaccine is rolled out in the coming weeks, the Treasury Department may be less inclined to extend the programs. Mr. Trump could also block a reauthorization by pressuring Mr. Mnuchin, leaving Mr. Biden with fewer economic stimulus tools at his disposal. …state and local governments are facing budget shortfalls, albeit smaller ones than some had initially projected.

Nick Timiraos reports on the issue for the Wall Street Journal.

Divisions over their future are being amplified by partisan gridlock in Congress over whether to provide more economic stimulus. Democrats, looking ahead to President-elect Joe Biden’s inauguration in January, see the programs as a potential tool to deliver more aid if Congress doesn’t act, while some Republicans are worried about relying on central bank lending powers as a substitute for congressional spending decisions. …A decision not to renew the programs…could also deprive some…governments of access to low-cost credit if market conditions worsen. …If the Trump administration decides not to extend the programs, Mr. Biden’s Treasury Department could determine whether to reactivate them in some fashion after the new administration takes office Jan. 20.

The bottom line is that a Biden Administration likely will be able to give states and localities a bailout, even if Congress doesn’t approve a new “stimulus,” and even if the Trump Administration doesn’t extend the Federal Reserve’s authority. But at least the incoming Biden people would have to jump through a few hoops.

Which is very unfortunate since it will reward the jurisdictions that behaved recklessly. A classic example of “moral hazard.”

I’ll close with this critical bit of data from Chris Edwards. As you can see, state and local governments actually have profited from the coronavirus since they got far more money from the CARES Act than they lost because of diminished tax revenue.

P.S. For what it’s worth, the Federal Reserve has always had the ability to steer money to state and local governments, both as part of normal monetary policy operation and because of its vast emergency powers. The good news is that it has not gone down that path.

And the best way to make sure it doesn’t go down that path in the future is to eliminate or restrict such powers. Private markets, which reflect the preferences of consumers, should determine the allocation of capital. We don’t want to copy the mistakes of China and have government making those choices.

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Back in 2013, I wrote about Phil Mickelson escaping high-tax California and moving to zero-income tax Florida.

The famed golfer grew up in California, but decided that the 2012 decision to boost the top tax rate to 13.3 percent mattered more than beautiful climate and wonderful scenery.

Needless to say, Mickelson’s not the only tax exile. Florida, Texas, Nevada, and other zero-income tax states receive a steady stream of entrepreneurs, investors, business owners, and others who are tired of California’s predatory politicians.

And celebrities as well. Yahoo! Entertainment reports that a famous rock star is leaving the not-so-Golden State.

Gene Simmons has put his longtime Beverly Hills mansion on the market for $22 million, citing California’s “unacceptable” tax rates as the reason for his move. After 34 years at the home, the KISS rocker and his wife Shannon are heading to Washington state. …In an interview with the Wall Street Journal, Simmons explained, “California and Beverly Hills have been treating folks that create jobs badly and the tax rates are unacceptable. I work hard and pay my taxes and I don’t want to cry the Beverly Hills blues, but enough is enough.”

When I read stories like this, I wonder if my friends on the left will learn any lessons about tax competition, the Laffer Curve, or the economic consequences of bad tax policy.

But I also confess that I’m amused by stories like this.

And so are the folks at America’s top site for satire, the Babylon Bee.

Here are some of their recent articles about California, starting with Governor Newsom’s plan to hinder the exodus of taxpayers.

In a move to prevent Californians from fleeing by the millions, Gavin Newsom announced a ban on gasoline automobiles this week. The law will make it so that Californians can’t drive away and escape the state in a matter of hours… “Now, they’ll have to cross the desert on foot,” Newsom said as he handed down the order. “I’ll show them, trying to flee my progressive utopia! Ha ha ha ha ha!”

The Governor apparently forgot to also ban trucks.

And U-Haul is taking advantage with a new advertising campaign.

To help meet the demand of millions of people desperately trying to escape the dark, ravaged wasteland of California, U-Haul is introducing a new product in its moving van line-up: the War Rig. These weaponized, armored moving vehicles will ensure you and your belongings stay safe during the long and perilous journey out of the state. …said local U-Haul franchise owner Glax Destroyer, who manages 12 locations in Southern California. “We brought in the War Rig to supplement our completely depleted fleet of moving vans. With everyone leaving in droves, we don’t have much left. We’re pretty much salvaging old trucks from the junkyard and then adding armor plating and mounted weapons.”

One problem, though, is that the people escaping from California bring along their bad political preferences.

Which has convinced Texas officials to impose a ban on their ability to vote.

To the relief of Texans across the state, Governor Greg Abbott has signed a law prohibiting escaping Californians from voting after they move to Texas. Experts say this will prevent the happy and prosperous slice of heaven from sliding into the endless despair and crushing poverty of leftist policy. …According to sources, emergency legislation was drafted after it was discovered that 97% of Californians favor destroying every small business on the planet and salting the earth where the businesses once stood. They also favor mandatory gay marriage and banning all country music to avoid hurting the ears of sea turtles. …Californians have marched on the state capital to demand their voting rights back, and have promised they’ll move on to Oklahoma after they finish destroying Texas.

On a serious note, there’s actually some evidence that the folks moving into Texas are more conservative than average.

And with regards to the big-picture issue of California policy, I recommend these columns from 2016 and 2020.

P.S. If you want data comparing Texas and California, click herehereherehere, and here.

P.P.S. My favorite California-themed jokes (not counting the state’s elected officials) can be found herehere, here, and here.

P.P.P.S. Here’s some tongue-in-cheek advice for California from Walter Williams.

P.P.P.P.S. Even Bill Maher is upset about California taxes, though he hasn’t (yet) voted with his feet.

 

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