More Good News Thanks to Colorado’s TABOR Spending Cap

Colorado has the best fiscal rule in the United States. The Taxpayer Bill of  Rights (TABOR) limits state government spending so that it cannot grow faster than inflation plus population.

Does Colorado’s spending cap work perfectly? Of course not.

Politicians in the Centennial State have spent decades coming up with ways evade and avoid TABOR’s restrictions.

But let’s not make the perfect the enemy of the good.

A study published last year shows that TABOR has saved taxpayers $8.2 billion.

And taxpayers in Colorado may soon keep even more of their money according to an article by Brian Eason in the Colorado Sun. Here are the relevant excerpts.

…the budget will be squeezed primarily by two seemingly minor factors. One, U.S. Census estimates now say the state’s population grew by less than the state’s demographer had anticipated. That means the state revenue cap under the Taxpayer’s Bill of Rights, which tracks inflation and population growth, can only increase by 5.8% this budget year rather than the 6.1% legislative forecasters were expecting. Two, the state is now expected to collect $185 million more in road usage fees and retail delivery charges this year than last, under the legislative staff estimates. Taken together, the two forecast changes mean state lawmakers could have to issue larger than expected TABOR refunds to Coloradans next year, leaving the state with fewer General Fund tax dollars to spend… That would translate to a nearly $400 refund for the average single-filer in 2025 under the current refund formula, which is tiered based on income.

I’m tempted to call this the feel-good story of 2024. Politicians get less money to waste and taxpayers get more of their money returned.

No wonder TABOR is the gold standard for good fiscal policy at the state level. And Switzerland shows that spending caps also are very effective at the national level.

By contrast, there is very little evidence that balanced-budget rules produce good results.

P.S. Perhaps the best evidence for TABOR is that the pro-spending lobbies in Colorado are always trying to trick voters into approving ballot initiatives that would allow more spending. But as we saw in 2013, 2019, and 2023, the voters of left-leaning Colorado keep voting to to maintain their spending cap.

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Another School Choice Victory

The 2020s, at least so far, should be known as the school choice decade. Here are some examples of progress, starting in early 2021.

• West Virginia
• Arizona
• Iowa
• Utah
• Arkansas
• Florida
• Indiana
• Oklahoma
• North Carolina

But if this map from the Education Freedom Alliance is any indication. I’ll be addressing the issue many more times over the next two years.

By the way, this map changed very recently.

That’s because Alabama became the most recent state to adopt choice. Here are some details from a local news outlet.

HB129, called the CHOOSE Act, would create education savings accounts, or ESAs, for families of students to use toward eligible education expenses. The Senate Education Budget committee approved the House version in a hastily rescheduled meeting Tuesday afternoon. The final vote Wednesday was 23-9 and fell along party lines, with Republicans voting yes and Democrats voting no. …“It was an honor to work with Governor Ivey and her team to swiftly pass a school choice bill that she declared her number one priority this Session,” Sen. Arthur Orr, R-Decatur, said in a statement after the vote. …“Children are our future, and there is no greater responsibility for lawmakers than ensuring our kids have every resource needed for academic success regardless of their zip code,” Senate President Pro Tempore Greg Reed said. …The first ESAs will be available in the 2025-26 school year and will be limited to eligible students. All students will be eligible for ESAs at the start of the 2027-28 school year. …The parent of a student receiving an ESA must agree to pay the remaining amount of tuition or expenses beyond the $7,000 cap.

Congratulations to Alabama families.

I’ll close with the observation that the great school choice news in recent years has only been possible because the American system still has a decent amount of federalism.

Not as much as we used to have, unfortunately, but still enough that sensible states have the liberty to do good things (bad states, by contrast, will continue to neglect children and instead use their education systems as a way of transferring money to teacher unions).

P.S. One takeaway is that the Department of Education in Washington should be abolished.

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The Alaska Public Pension Fight and Lessons for the Nation

America’s big national challenge with retirement income is a deeply indebted Social Security system.

There’s also a significant problem at the state level, where many governors and state legislators have made extravagant promises of lavish retirement benefits to their (overpaid) bureaucrats.

But, in many cases, they haven’t set aside enough money to fulfill those promises.

The underlying problem is that states generally rely on the approach know as “defined benefits,” which means that they promise bureaucrats specific amounts of money based on factors such as salary and years of service.

But promising the money is easy, especially since government employee unions often are big contributors to the politicians making those promises.

A far better approach is use the “defined contribution” approach, which is the same model as the IRAs and 401(k)s that are common for private sector workers. The government pays specific amounts into the accounts of bureaucrats, who then decide how and when to use their funds in retirement.

The Wall Street Journal opined on this issue earlier this week. Here are some excerpts.

Unfunded pensions for public workers have become a huge fiscal burden on many states, and the smarter states like Florida have moved to limit future liabilities by moving to defined-contribution plans. That makes it all the more strange that Alaska may risk its future fisc by returning to defined-benefit pensions. …The plan would pay retirees a fixed amount annually… Payments would rise automatically with inflation each year… Retirees with three decades of experience would keep about 63% of their salaries, up from 53% today. …In 2006 Juneau replaced its fixed pensions with 401(k)-style plans. Retirement costs were growing so rapidly at the time that the main public-employee fund remains about $3 billion short of full funding today, though it’s added no new members since it was closed. Restoring the old pension system could deepen this hole in a hurry. An analysis by the Reason Foundation…projects a $9 billion liability over the long run. …Republican Gov. Mike Dunleavy hasn’t taken a definite position. It should be an easy choice. Public-worker pensions create incentives for ever-higher taxes as current politicians seek near-term political support by adding to taxpayer liabilities that have to be paid on some future Governor’s watch. Down that road lies New Jersey or Illinois.

Fortunately, the waffling governor does not have to look very far for a better choice.

As explained by Ryan Frost for Reason, some lawmakers in the state’s House of Representatives instead want to expand the state’s defined contribution system.

Two competing public employee pension bills reached the Alaska House of Representatives last week. One would revert Alaska back to a fiscally unsustainable public pension plan that adds to the state’s debts, while the other would maintain important reforms and even allow the state’s teachers to access a better, more flexible retirement plan. …House Bill 302 (HB 302), sponsored by Rep. Ben Carpenter (R-Nikiski), would leave the defined contribution retirement plan (DCRP) open, increase the employer contribution rates for public safety, and—crucially—open access to the Supplemental Benefit System-Annuity Plan (SBS-AP) to teachers. …Under HB 302, public safety employer contributions would be substantially increased from 5% of pay to 9.74% of pay. …the decisions between House Bill 302 and Senate Bill 88 could well define Alaska’s fiscal landscape for generations to come, either ensuring a legacy of prudent, responsible stewardship of the state’s public sector retirement system or adding billions in debt for future Alaskans to pay.

The bottom line is that Alaska used to have a terrible system, and the state still has a huge unfunded liability because of that old system.

So it’s almost incomprehensibly foolish that some politicians in the state want to resuscitate the defined-benefit approach. Especially since they could expand their existing defined-contribution system instead.

P.S. For more information on the handful of state and local governments with defined-contribution systems, click here, here, and here.

P.P.S. Even though Alaska has a good tax system, that doesn’t mean it has good fiscal policy. The state collects a lot of energy taxes and that money finances a bloated (and often corrupt) government. Hopefully state lawmakers will wise up and enact a spending cap.

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Florida’s One-Man Laffer Curve

Inflation is having an effect on everything, even policy analysis.

Back in 2013, I wrote that Phil Mickelson was “California’s One-Man Laffer Curve” because he wanted to escape the Golden State to save about $1.2 million per year in taxes.

But now, when a goose that lays golden eggs wants to escape, the numbers are much bigger.

How much bigger?

According to this story by CNBC, Jeff Bezos saved more than $600 million by moving from Seattle to Miami. That’s the steroid-fueled version of a one-man Laffer Curve.

Here are some excerpts from the report, which was authored by Robert Frank.

Jeff Bezos’ $2 billion stock sale last week came with an added perk: no state taxes. Last year, Bezos announced on Instagram that he was leaving Seattle after nearly 30 years to move to Miami. He said the move was to be closer to his parents and his rocket launches at Blue Origin. The timing also suggested another reason: taxes. In 2022 Washington state imposed a new, 7% capital gains tax on sales of stocks or bonds of more than $250,000. Washington state doesn’t have a personal income tax, so the new levy marked the first time Bezos would face state taxes on his stock sales. …In 2022, when the tax took effect, Bezos stopped selling. He didn’t sell any Amazon stock in 2022 or 2023… After his move to Miami, Bezos made up for lost time. Last week, a filing with the SEC revealed that Bezos launched a pre-scheduled stock-selling plan to unload 50 million shares before Jan. 31, 2025. At today’s price, that would total more than $8.7 billion. Florida has no state income tax or a tax on capital gains. So on the $2 billion sale last week, he saved $140 million that he would have paid to Washington state. On the entire sale of 50 million shares over the next year, he will save at least $610 million. …he’s more than paid for his 417-foot yacht, Koru, with just his Florida tax savings.

I have two reactions to this report, one analytical and one visceral.

• My analytical reaction is that this story is good news because it keeps money in the private sector where it will be used more productively and also because it sends a powerful signal to the proponents of a state suicide pact that it is foolish to overtax people who can easily move.
• My visceral reaction is to cheer that the greedy politicians in the state of Washington wound up with an exploding cigar rather then several hundred million dollars that they could use to buy votes. For what it’s worth, I expect more rich people follow in Bezos’ footsteps.

P.S. I wonder about the revenue implications of the state capital gains tax in Washington. Notwithstanding Bezos moving out, I’m sure there will be some revenue collected from this misguided levy. But that doesn’t mean the tax will be a net plus for politicians. You also need to consider that the exodus of successful taxpayers will lead to less revenue from sales taxes, property taxes, and other levies.

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The Laffer Curve’s Latest Victim: California

The Laffer Curve is the common-sense notion that people respond to incentives.

And even Paul Krugman admits this has implications for tax revenue.

For instance, if tax rates increase, people may decide to earn and/or report less taxable income. When that happens, revenue won’t increase by as much as politicians hope.

And the reverse is true (in some cases, dramatically true) if tax rates decrease.

For today’s column, let’s look at a real-world example of the Laffer Curve.

Joshua Rauh of Stanford and Ryan Shyu of Amazon have new research that looks at what happened after California voters approved a big class-warfare tax increase in 2012.

Here are some excerpts from their study.

In this paper we study the question of the elasticity of the tax base with respect to taxation…on the universe of California taxpayers around the implementation of major 2012 ballot initiative, Proposition 30. …The Proposition 30 ballot initiative increased marginal income tax rates…by 3 percentage points for singles with over $500,000 in taxable income (married couples with over $1 million)…, the highest state-level marginal tax rate in the nation. …We…document a substantial onetime outflow of high-earning taxpayers from California in response to Proposition 30. …For those earning over $5 million, the rate of departures spiked from 1.5% after the 2011 tax year to 2.125% after the 2012 tax year, with a similar effect among taxpayers earning $2-5 million in 2012. …California top-earners on average report $522,000 less in taxable income in 2012, $357,000 less in 2013, and $599,000 less in 2014; this is relative to a baseline mean income of $4.15 million amongst our defined group of California top-earners in 2011. Compared to counterfactuals in similarly high-tax states, California top-earners on average report $352,000 less in taxable income in 2012, $373,000 less in 2013, and $481,000 less in 2014.

So some upper-income taxpayers moved and others (unsurprisingly) earned/reported less taxable income.

Did that have an impact on tax revenue?

The answer is yes.

…we assess the implications of our estimates for tax revenue in the context of California Proposition 30. A back of the envelope calculation based on our econometric estimates finds that the intensive and extensive margin responses to taxation combined to undo 45.2% of the revenue gains from taxation that otherwise would have accrued to California in the absence of behavioral responses within the first year and 60.9% within the first two years.

Wow, more than 60 percent of projected revenue evaporated within two years.

By the way, these estimates are based on data only through the middle of last decade. And something significant happened after that: The state and local tax deduction was curtailed as part of the Trump tax package.

The authors speculate that this will have very important implications.

…the “Tax Cuts and Jobs Act” (TCJA). Under this law, the top rate is 37% for single and head-of-household filers earning over $500,000, and for married filers earning over $600,000. Despite this nominal cut to top rates, the legislation on net increased rates on top earners because it capped state and local deductions at $10,000 total. … we use our top line intensive margin elasticity estimate to provide a ballpark quantification of the federal tax revenue implications of TCJA for the particular set of California high earners in our treatment group. …Consider a married California taxpayer earning $4.15 million of wage income. In 2017, this taxpayer pays a federal tax bill of $1,431,305. In 2018, incorporating the 8.6% income decrease, this taxpayer pays a federal tax bill of $1,333,946. This amounts to a 6.8% decrease in tax revenue, putting the TCJA on the wrong side of the Laffer Curve for high-earning individuals in California. … the TCJA increased incentives (in terms of the level of the average tax rate gap) to leave California for zero-tax states by 2.15 times the amount of Proposition 30 for those earning over $5 million, and by a factor of 2.43 for those earning from $2-5 million. Based on these scaling factors, we would predict an out-migration effect of 1.46% of those earning $2-5 million, and 1.51% of those earning $5 million.

None of this should be a surprise.

Indeed, I wrote back in 2012 that bad things would happen when Proposition 30 was approved.

I feel safe in stating that this measure is going to accelerate California’s economic decline. Some successful taxpayers are going to tunnel under the proverbial Berlin Wall and escape to states with better (or less worse) fiscal policy. …It goes without saying, of course, that California’s politicians…will act surprised when revenues fall short of projections because of the Laffer Curve.

To be fair, I don’t know if California politicians are genuinely surprised. I suspect many of them privately understand the adverse consequences of class-warfare tax policy. But they nonetheless support bad policy because they are motivated by a selfish desire to maximize votes.

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The Simple Recipe for Abolishing a State Income Tax

The good news is that Louisiana voters recently voted to lower their state’s top income tax rate.

The bad news is that Louisiana’s economic policy still leaves much to be desired.

• Ranked #40 by the Tax Foundation.
• Ranked #26 by the Fraser Institute.
• Ranked #30 by the Cato Institute.

But there are signs of hope.

There’s a new governor, Jeff Landry, and that may mean a better approach.

In an article for the New Orleans newspaper, Tyler Bridges writes that the new governor’s transition team wants to eliminate Louisiana’s income tax.

Both the personal tax and corporate tax. Here are some excerpts from the article.

Gov. Jeff Landry and state legislators ought to begin phasing out corporate and personal income taxes. That’s the recommendation of the governor’s transition committee on economic development and fiscal policy… The committee provides no plan for how to offset the huge hit to the state treasury… Ditching the income tax has been a conservative rallying cry for years… The transition committee’s report blames Louisiana’s “antiquated” and “complex” tax system for stymieing investment and job creation. “While our total tax burden is competitive with our neighbors, our tax structure is not, ranking 40th in the latest Tax Foundation rankings,” the report said, “…We must look to other southern states and identify where they get it right and where we get it wrong.”

If they want to know how to get it right, they can look next door at Texas. The Lone Star State does just fine without an income tax.

But an even better option is Florida, which also has no income tax. But, even more important, Florida has a much lower burden of spending that Louisiana.

According to Census Bureau data (albeit from a few years ago), government in Florida spends more than $2,000 less per capita than government in Louisiana.

Is Louisiana getting better results for all that money?

Of course not.

So the simple recipe to make Louisiana’s dream a reality is to impose a spending cap. Sort of like TABOR in Colorado.

P.S. Louisiana does have a good rule for political corruption.

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A State Suicide Pact, Part II

Almost exactly one year ago, I wrote a column about a coordinated effort to impose class-warfare tax increases in seven left-wing states.

Fortunately, that effort fizzled.

Meanwhile, there was continued progress in other states to lower tax rates. The net effect was “the feel-good map of 2023.”

And we have more and more evidence that taxpayers are “voting with their feet” by moving to the lower-tax states.

So it would seem that the issue is settled, right?

Not exactly. Our friends on the left have not given up.

David Chen of the New York Times reports that there’s now an effort to impose class-warfare taxes in 10 states.

Here are some excerpts from his story.

Lawmakers in Vermont are introducing legislation this week that would impose new taxes on the state’s wealthiest residents, joining a growing national campaign… One proposal in Vermont would tax people with more than $10 million in net worth on their capital gains, even if the gains have not yet been realized. Another would add a 3 percent marginal tax on individual incomes exceeding $500,000 a year… The package of bills is part of a broader push across the country by progressive groups… the campaign began in earnest a year ago, when legislators in seven states…coordinated the introduction of bills… None of those proposals got out of committee. But this year, with Vermont, Pennsylvania and possibly other states joining the fold, organizers are redoubling their efforts… Some of the ultrawealthy agree: More than 250 billionaires and millionaires, including heirs to the Rockefeller and Disney fortunes, recently signed an open letter, coinciding with the World Economic Forum in Davos, Switzerland, that urged world leaders to tax them more.

With regards to the rich people who claim to want higher taxes, I invite them to follow these instructions on how to voluntarily pay extra money to Washington.

But since none of them ever go for that option, we can safely assume that they are virtue-signalling hypocrites.

So let’s instead consider what will happen if politicians succeed in raising taxes in any of the 10 states mentioned in the article. And we’ll use Vermont as an example.

The top tax rate in Vermont is currently 8.75 percent and some politicians want to push that rate to 11.75 percent. If they are successful, Vermont will have the nation’s second-highest top tax rate, with only California being worse.

That’s economic suicide, especially since Vermont is right next to zero-tax New Hampshire.

And if Vermont politicians also impose a tax on unrealized capital gains (an idea so crazy that no other government has ever imposed such a levy), then the state’s suicide timetable will get even more compressed.

For what it’s worth, part of me perversely hopes Vermont goes down this path.

Just like it is helpful to have good examples, it’s also helpful to have bad examples. New Hampshire vs. Vermont could be the domestic version of Switzerland vs Greece.

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Blue-to-Red Tax Migration, Part V

Time for the final segment of my five-part series for 2023 on blue-to-red tax migration (previous versions here, here, here, and here).

We’ll start with this table showing what has happened in America’s 10-largest states.

You should notice a pattern.

The table comes from a column for National Review written by Dan McLaughlin. He explains what these numbers mean.

The Census Bureau has announced its year-end estimates of state population changes… They once again show the continuing trend of America’s population shifting out of its bluest states and into red states… The biggest boom states in the past year? In terms of raw numbers, Texas and Florida dwarf everyone else, followed by North Carolina and Georgia… In percentage terms, South Carolina was the biggest winner… Eight states lost population. New York was by far the biggest loser, dropping over 100,000 people, 0.5 percent of its population in a single year. Five of the eight states have been governed by Democratic trifectas for this entire decade.

The Wall Street Journal editorialized a few days ago about this internal migration. Here are some excerpts.

The U.S. population increased by 1.6 million between July 2022 and July 2023, with states in the South accounting for about 1.4 million of the growth. Leading the boom were Texas (473,453), Florida (365,205)… Eight states saw population declines, with the biggest in New York (-101,984), California (-75,423) and Illinois (-32,826). …what these states have in common: High taxes, burdensome business regulation and inflated energy and housing prices. ….An interesting natural experiment has been Washington state, which gained tens of thousands of people from other states on net each year in the last decade. But since enacting a 7% capital-gains tax on higher earners in 2021, Washington has been losing residents to other states at an accelerating pace—15,276 this past year. …A big problem for Democratic-run states is that their affluent residents are leading the exodus, and they pay the majority of income tax that supports their expansive welfare programs.

By the way, the WSJ‘s editorial explains that there are political implication of America’s internal migration.

State migration has long-tail political consequences. California, New York, Illinois, Minnesota and Rhode Island and Oregon on present trend would lose a combined 12 House seats in the 2030 reapportionment, which is as many as Florida, Georgia, Texas, Tennessee, North Carolina, Utah and Idaho would collectively gain.

And the National Review column includes a map for those of us who like visuals.

I’ll close by noting that blue states aren’t just losing political power. They’re also losing lots of taxable income.

P.S. I think taxes are a major factor in driving internal migration, but there are other factors as well (see here, here, here, here, and here).

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Red States vs. Blue States, Part V: Florida vs. California

I’ve written lots of columns comparing Texas and California (see here, here, here, here, here, here, here and here), and also several columns comparing Florida and New York (see here, here, here, here, and here).

We’ll break from that pattern today because we’re going to compare Florida and California, motivated by tonight’s Fox TV debate between Gov. Ron DeSantis and Gov. Gavin Newsom.

We’ll start with this table put together by Peter Coy of the New York Times. If Florida won, I awarded a red star and if California won, I awarded a blue star (and no stars if there was a tie or the category was irrelevant).

Florida won the most categories, though California has higher income (but also a much-higher cost of living).

Here’s a table prepared by the Committee to Unleash Prosperity. No need to add any stars since Florida wins every category.

I’ll close with a few excerpts from an editorial by the Wall Street Journal.

Gavin Newsom and Ron DeSantis are set to square off…in a Fox News debate… Besides offering voters a look of the alternatives to Joe Biden and Donald Trump, the showdown between the California and Florida governors could provide a revealing policy contrast. Sacramento has rushed to the left in recent decades while Tallahassee has moved to the right. Since winning election in 2018, Messrs. Newsom and DeSantis have advanced sharply different policies on Covid lockdowns, taxes, school choice and climate regulation, among other things. …here is a scorecard of policy results. …Since January 2019, employment has increased by 1,031,030 in Florida while declining by 85,438 in California. …California’s 4.8% jobless rate is the second highest in the country and nearly twice as high as Florida’s (2.8%). …State and local taxes in California add up to $10,167 per capita versus $5,406 in Florida. …Despite its higher taxes, California boasted a $31.5 billion budget shortfall in May while Florida ran a $17.7 billion surplus.

Based on the data, DeSantis has already won the debate.

Though messaging and style matter in politics, so we’ll see what happens in tonight’s debate.

P.S. We’ll make this column Part V of our series on red states vs blue states (previous editions available here, here, here, and here).

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FitFS 2023: Live Free or Die in New Hampshire

When I’ve written about Freedom in the 50 States (as I did in 2016, 2019, and 2022), it seems that Florida and New Hampshire routinely get the best scores.

Well, the same is true for the latest edition. As you can see from this map, New Hampshire is the nation’s most libertarian state with Florida in second place.

To calculate the rankings, Freedom in the 50 States measures both economic freedom and personal freedom.

If we look solely at economic freedom, we can say that New Hampshire is both the most libertarian state and the most laissez-faire state.

Once again, Florida win the runner-up prize (and South Dakota is in third place in both rankings).

The worst states, in both rankings, are New York, Hawaii, and California. No big surprises.

For number geeks, let’s look at the scores for each state.

Here is the data for overall freedom.

And here is the data for economic freedom.

I suppose we should give a consolation prize to Tennessee, which just barely missed out being in the top 5 on both lists.

And New Jersey and Oregon deserve a booby prize for being in the bottom 5 on both lists.

I always like looking at trends. If we look at what’s happened to economic freedom over time, there’s good news and bad news.

On the positive side, the average level of economic freedom is higher today than it was about 20 years ago. On the negative side, average scores have plummeted since 2020.

Both the above numbers are just averages, so we don’t know which states are getting better or worse.

So here’s one final visual. The publication highlights changes in overall freedom in selected states.

Interestingly, there is policy divergence. The worst-performing states are getting worse over time while the top states are getting better over time.

If you want to know why that matters, check out the data on how Americans are voting with their feet.

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Blue-to-Red Tax Migration, Part IV

State-to-state migration is an underappreciated issue, for both economic and political reasons. And I’ve explained that taxes play a huge role.

• In Part I of this series, we looked at how people – and taxable income – are moving from high-tax states to low-tax states.
• In Part II of this series, we reviewed how tax-motivated migration will create further fiscal nightmares for high-tax states.
• In Part III of this series, I shared excerpts from a column I wrote for Bloomberg about why state tax competition is desirable.

For Part IV of this series, let start with this map from Axios showing the 10 biggest state-to-state moves in 2022.

The obvious takeaway is that people are escaping the fiscal hellholes of California and New York.

The second takeaway is that tax migrants are mostly picking states with no income tax. And when they don’t move to states with no income tax, they move to states with flat taxes.

But there is a very interesting story to tell about the state of Washington. Yes, it’s getting plenty of tax refugees from California, but it’s also losing one very prominent taxpayer.

Because although Washington has no income tax, politicians are trying to impose one. And they already have saddled their taxpayers with a capital gains tax and a death tax.

Jeff Jacoby of the Boston Globe explains that those taxes won’t collect any money from Jeff Bezos.

Jeff Bezos, the founder of Amazon and the third-richest person in the world, has lived in Washington state for nearly 30 years. …he has decided to relocate to Miami. …Bezos is almost certainly going to save money — a lot of money — once he is no longer subject to Washington’s tax laws. To begin with, Washington has a new capital gains tax, which was upheld by the state’s highest court in March. …By relocating to Florida, he ensures that future stock sales will likewise remain untouched by Washington’s new capital gains levy. That’s not all. Washington had no estate tax during the years when Bezos was building Amazon into a commercial giant, but that changed after 2005. Now Washington has the steepest death tax in the nation, with a top rate of 20 percent on estates worth more than $9 million. Florida, on the other hand, has no estate tax at all. For a man with a personal fortune of more than $160 billion, the move from Washington to Florida could be worth $30 billion or more to his heirs.

What’s the logical conclusion?

Jacoby provides the answer, telling politicians that Bezos and other rich people can vote with their feet.

He has also provided fresh evidence of an economic fact of life: When taxes get too high in one state, the wealthy can move to another one. …In progressive circles, it remains an article of faith that high tax rates don’t drive people to flee, but evidence to the contrary is overwhelming. Massachusetts, Washington, California, and Illinois can keep waving goodbye as prosperous taxpayers keep relocating to Florida, Texas, Arizona, and New Hampshire. Or they can pull their heads out of the sand and acknowledge that reality isn’t optional. In the real world, when you try to soak the rich, you’re apt to lose the rich.

Amen. The geese with the golden eggs can and will fly away. One of the reasons that tax competition should be celebrated.

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Great Election Result

Since I care about policies rather than politicians, yesterday’s most important election was a referendum that took place in Colorado.

The big-spending lobbies once again tried to weaken the state’s spending cap, known as TABOR, or the Taxpayer Bill of Rights.

Yet even though Colorado voters lean to the left, they overwhelmingly rejected Proposition HH. Here are the results.

I underlined the most important part of the above description because the anti-TABOR crowd tried to deceive voters by portraying Prop HH as a measure to lower property taxes.

As I wrote last month, “Will Colorado voters be tricked by Proposition HH? Will they be distracted by the shiny bauble of lower property taxes while politicians grab a greater amount of income tax revenue?”

Fortunately, the voters saw through the ruse.

Here’s how Nick Coltrain and Seth Klamann of the Denver Post described the outcome.

Colorado’s wide-ranging Proposition HH, a property tax relief and education-funding measure pressed by the state’s Democratic leaders, went down in defeat Tuesday night as voters were rejecting it by 20 percentage points. More than 60% of voters rejected Proposition HH…voters in all but a handful of counties were on track to reject the major policy proposal put forth by Gov. Jared Polis and legislative Democrats… It was the second time in four years that voters rebuffed an attempt by state Democrats to raise spending limits under the Taxpayer’s Bill of Rights, or TABOR. …Proposition HH marked the latest defeat as Democrats attempted to leverage their trifecta in state government to hold onto more tax money. On the 2019 ballot, they ran Proposition CC, which proposed to retain all taxes collected beyond the TABOR cap, ending refunds, in a bid to shore up the budget. Voters rejected Prop. CC.

If you want to track the history of anti-TABOR initiatives, I wrote about Prop CC in 2019. And I also wrote about an anti-TABOR initiative that failed back in 2013.

If Republicans were smart (don’t laugh), they would push TABOR-style spending caps in other states.

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SBTCI 2023: Which States Are Best and Worst (and Moving in the Right and Wrong Direction)

Over the past week, we’ve looked at both the Tax Hell Index and the International Tax Competitiveness Index, giving us a good idea of which nations have terrible and not-so-terrible tax policy.

Today, let’s look at which states rank high and low on tax policy.

Here’s a map from the Tax Foundation’s new State Business Tax Climate Index. The top-3 states are Wyoming, South Dakota, and Alaska and the bottom-3 states are New Jersey, New York, and California.

Of the top-10 states, six have no state income tax and three have flat taxes.

Conversely, all of the bottom-10 states have so-called progressive taxes that discriminate against entrepreneurs, investors, small-business owners, and other high-income taxpayers.

A lot has been happening at the state level, so here are some of the highlights (and one lowlight).

Arizona transitioned from a two-bracket, graduated-rate individual income tax system with a top rate of 2.98 percent to a flat tax rate of 2.5 percent… This major development helped the state improve seven places on the individual income tax component and five places overall, from 19^th to 14^th.

Iowa witnessed significant changes in its tax landscape this year. Notably, the state reduced its top marginal individual income tax rate from 8.53 to 6.0 percent… As a result, Iowa’s overall ranking improved from 38^th to 33^rd.

Massachusetts fell further than any other state in the overall rankings this year, sliding 12 places since last year. This decline in tax competitiveness is due to the adoption of Question 1 in November 2022, which amended the state’s constitution to move from a single-rate to a graduated-rate income tax by imposing a 4 percent surtax on income over $1 million, raising the top marginal individual income tax rate from 5 to 9 percent.

Mississippi’s ranking improved from 27^th to 20^th overall. The state improved from 13^th to 8^th on the corporate tax component… The implementation of a flat individual income tax drove a seven-place improvement on the individual income tax component, from 26th to 19th.

Kudos to Mississippi for moving up seven spots, as well as Arizona and Iowa for jumping five spots.

And Massachusetts has really hurt itself, dropping by 12 spots.

P.S. As I’ve noted before, I think Wyoming and Alaska are overrated since they collect so much revenue from energy taxes.

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Mirror, Mirror, on the Wall, Which State Provides the Most Handouts of All?

Back in 2010, I put together a “Moocher Index” based on the percentage of non-poor people in each state getting government handouts.

Based on that back-of-the-envelope calculation, Vermont, Mississippi, and Maine were the biggest moocher states and Nevada, Colorado, and Arizona were the most self-reliant states.

Then, in 2013, I shared some data looking at the value of welfare benefits in each state, compared to both the median wage and to the federal poverty rate.

Sadly, those numbers showed it was more lucrative in many states (especially in the Northeast and Hawaii) to live off the government rather than work.

Today, let’s look at which states are the most generous with handouts. The Committee to Unleash Prosperity shared this table yesterday, which ranks states based on the level of per-capita spending on public welfare.

The folks at CTUP highlighted California and Florida. Since I usually do New York-vs-Florida and California-vs-Texas comparisons, I added a couple more numbers.

P.S. Looking at the above numbers, keep in mind that there is a Laffer Curve-type relationship between redistribution spending and the poverty rate. So states like Florida and Texas presumably are reducing poverty while states such as New York and California are subsidizing it.

P.P.S. Compared to other industrialized nations, the United States has a relatively low level of welfare spending.

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The Most Important Ballot Initiative of 2023

Every year, I highlight the most important ballot initiative or referendum.

• In 2022, Massachusetts voters tragically voted to replace the state’s flat tax with a system based on class warfare.
• In 2021, voters in the state of Washington overwhelming expressed their opposition to a capital gains tax.
• In 2020, Illinois voters wisely rejected the pro-spending lobbies and voted to retain that state’s flat tax.
• In 2019, voters in Colorado voted down an initiative that would have weakened the Taxpayer Bill of Rights.

For 2023, Colorado will once again have the spotlight.

That’s because the pro-spending lobbies and their allied politicians have not given up on their campaign to gut TABOR.

As far as they are concerned, the $8 billion-plus that has been refunded to taxpayers is money that should have been used to finance bigger government.

They hate that there is an annual spending cap that limits the growth of government. So the fact that they lost in 2019 (and in 2013 as well) isn’t stopping them from putting another proposition on the ballot.

The newest anti-TABOR initiative is called Proposition HH and the Wall Street Journal editorialized last month about this bait-and-switch scheme.

Coloradans enjoy relatively low taxes for a blue state, but their luck may not last. Democrats in Denver are backing a measure that would blow through the state’s spending cap… The coming tax hazard is known as Proposition HH… It proposes two policy changes that work in opposite directions. The first would curb property-tax growth modestly by lowering the assessment rate. That would save about $4,600 for an average homeowner through 2032… The kicker is the second part. The same ballot measure would raise the amount the state can spend by about 25% a year… That change would cost each household about $5,100 over nine years, swallowing the savings from the property-tax cut. The changes could cost taxpayers an estimated net $21 billion through 2040. …Colorado Democrats have spent years trying to lift the spending cap, and the property-tax mirage is their latest gambit. …public unions, which want the no-limits spending of other Democratic-controlled states.

In a column for Forbes, Patrick Gleason expands on these concerns.

…the most consequential measure appearing on the November 2023 ballot…is found in Colorado, where voters will be asked whether they want to weaken the nation’s strongest tax and expenditure limit… Proposition HH…would weaken the state’s Taxpayer’s Bill of Rights (TABOR) by permitting the state to keep surplus revenue that would otherwise have to be returned to taxpayers. …Rather than sell HH as an initiative to end TABOR refunds moving forward so that government, not taxpayers, has more money to spend, Proposition HH backers have instead branded it as a property tax relief measure. …Opponents of HH have been pointing out that the measure would translate into forfeiture of TABOR refunds and ultimately lead to a much higher overall tax state burden in the future. …Proposition HH would raise the TABOR spending limit by a cumulative $12.5 billion over the first decade, around $65 billion over two decades.

Will Colorado voters be tricked by Proposition HH? Will they be distracted by the shiny bauble of lower property taxes while politicians grab a greater amount of income tax revenue?

We’ll find out next month.

Since TABOR is the gold standard of fiscal rules in America, I’ll be very interested to see what happens.

P.S. If I was including ballot initiatives from other nations, Chile’s rejection of a statist constitution would have been 2022’s most important result. And Switzerland’s rejection of “universal basic income” would have been the most important result of 2016.

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Ranking Education Freedom in American States

Given what’s recently happened in North Carolina, Oklahoma, Indiana, Florida, Arkansas, Utah, and Iowa,  I’ve been waiting with considerable anticipation for an update to the Heritage Foundation’s Education Freedom Report Card.

It will be interesting to see how the rankings change given all the new states that have adopted and/or expanded school choice.

In the meantime, the American Legislative Exchange Council has just released its Index of State Education Freedom, which now gives us another way of measuring the degree to which states are putting students first.

Here’s a map showing grades for all the states. The very best states – Florida, Arkansas, and Indiana – are dark blue.

The worst states are grey. No big surprises, other than North Dakota, Mississippi, and Nebraska.

Here’s a table showing the best to the worst.

Shame on Massachusetts, Rhode Island, and New York for being the worst of the worst.

The ALEC Index looks at five factors – school choice, charter schools, home schooling, virtual schooling, and open enrollment.

All the factors get equal weighting, but I think school choice is easily the most important one.

Here’s a map showing how states rank on that basis.

Kudos to Arizona, Arkansas, Florida, and Iowa for getting perfect scores in this all-important category (I assume the publication was finalized before North Carolina enacted its choice program, so the Tarheel State obviously no longer deserves an “F.”

And, with any luck, Texas will approve choice later this year and also get rid of its failing grade in this category.

P.S. For those who prefer an international perspective, there are very successful school choice systems in Canada, Sweden, Chile, and the Netherlands.

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The Link Between Spending Restraint and Good Tax Policy

Late last year, I praised lawmakers in Georgia and North Carolina for being fiscally responsible.

The burden of government spending in those states was constrained between 2020 and 2022, even though that was a period when handouts from Washington were leading other states to squander money recklessly.

In that column, however, I did not mention Iowa.

And that was probably an oversight because “the Florida of the north” deserves more attention.

To be more specific, the Hawkeye state is pursuing good tax policy and good spending policy, and that superior combination recently led the Wall Street Journal to opine on Iowa’s success.

Kim Reynolds…has made her state a model of good tax policy… Iowa wrapped up its fiscal year with a surplus of $1.83 billion. …the third surplus in a row in the Governor’s tenure. These results have followed significant tax cuts that have helped the state’s economy. …The top rate has dropped to 6% from 8.53% since 2022, and it is scheduled to drop to a flat 3.9% rate by 2026. Iowa’s top corporate tax rate next year will drop to 7.1% from 9.8% in 2022, and it is scheduled to fall to 5.5% if the state keeps hitting its revenue targets. …Crucially, state spending has grown modestly since 2021… Now the Governor wants to raise her bet on this winning formula. “My goal is to get to zero individual income-tax rate by the end of this second term” in 2027, she said. …The Iowa tax experience belies the claims of the left that cutting taxes produces deficits. In Iowa the tax cuts have helped to produce record surpluses that then can be used to cut income-tax rates further.

The most important part of the above excerpt is “state spending has grown modestly since 2021.”

Was Iowa as prudent as Georgia and North Carolina between 2020 and 2022? Not quite, but data from the National Association of State Budget Officers shows that Iowa easily beat the national average.

And it appears that Iowa will do even better when there is final data for 2023 and 2024.

John Hendrickson of the Iowans for Tax Relief Foundation recently wrote that, “During this past legislative session, the legislature enacted an $8.5 billion budget for fiscal year 2024… This was only a slight increase from the $8.2 billion fiscal year 2023 budget.” And six months ago he and Vance Ginn noted that, “The $8.2 billion budget for fiscal year 2023 represented a mere 1 percent increase from the prior year.”

The moral of the story is Governor Reynolds has the right formula. Because she has been restraining spending, it has been feasible to enact pro-growth tax reform. And because of continuing spending restraint, her goal of having no state income tax is very achievable.

Too bad Republicans in DC are not copying that formula.

P.S. Speaking of copying, other states should learn from Iowa’s enactment of universal school choice.

P.P.S. I’ve previously cited North Carolina as an example of a state that has restrained spending and lowered tax burdens.

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Red States vs. Blue States, Part IV

In our series on red states vs blue states, we’ve examined different economic variables.

• Part I: Economic growth
• Part II: Unemployment rates
• Part III: Employment growth

Today, let’s add another comparison.

Here’s a map looking at 2022 income growth by state. The three states most known for bad policy – New York, Illinois, and California – were among the handful of states that suffered a decline in personal income.

It’s also worth noting that most of the “weaker than average” states also are known for leaning left.

The Wall Street Journal has an editorial on the performance gap between red states and blue states. Here are some excerpts.

Personal income in California, Illinois and New York declined in 2022 for the first time since 2009… Personal income last year nationwide increased 2% in current dollars, which amounts to a real decline after inflation. …The opposite was true in the fastest-growing states, including Florida (4.7%), Arizona (4.9%), Texas (5%), Utah (5.5%), Colorado (5.8%), South Dakota (5.8%), Montana (6.1%), Idaho (6.5%), North Dakota (7%), and Delaware (8.8%). …The personal income declines in California, New York, Illinois and some other states would have been larger if not for the continued growth in Medicaid spending owing to the pandemic national emergency, which didn’t end until this spring. A federal food-stamp fillip also continued until March. …California, New York and Illinois used their allotments largely to cover pre-existing budget shortfalls, boost government worker pay, and bake into their budget new spending obligations. Those will become shortfalls once the pandemic money boom ends. Taxpayers, look out.

The last few sentences above are key.

When they get new money, either from tax increases or federal transfers, irresponsible politicians create long-run spending obligations.

And that creates the conditions for future tax increases, just as the WSJ warns.

Here’s one final item for today’s column. Back in July, the Wall Street Journal compared industry performance in red states and blue states.

Here’s a table comparing Texas and Florida vs. New York and California.

Game, set, and match.

The moral of the story is that big government doesn’t work well on the national level, it doesn’t work well on the state level, and it doesn’t work well on the local level.

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Ranking State Pension Debt

Whether at the federal level, state level, or local level, my biggest problem with bureaucrats is that many of them work for agencies and departments that should not exist.

My second biggest problem is that they are overpaid compared to workers in the productive sector of the economy.

And I could add other concerns, such as bureaucrat misbehavior, negative macroeconomic effects, and bureaucratic sloth.

But for today’s column, let’s focus on the narrower issue of pensions for state bureaucrats. But we’re not only going to be examining the overly generous guaranteed benefits that politicians have promised.

Those numbers are important. But, courtesy of Reason‘s Pension Integrity Project, we’re also going to see whether politicians have actually set aside the amount of money needed to fund those benefits.

I put Reason‘s numbers into categories to see which states were saddling their residents with future problems (often referred to as unfunded liabilities).

What do we see? Lo and behold, only three states have solvent systems, with four others being in decent shape.

However, to properly assess the future danger to taxpayers, it’s also necessary to know the relative size of state pension plans.

For instance, if a state does not offer a lot of guaranteed benefits, then the future burden on taxpayers won’t be that large, even if the state hasn’t set aside the money to pay those benefits.

Which is why it’s also important to look at unfunded liabilities per capita. Here are those calculations, courtesy of the folks at the American Legislative Exchange Council.

Measured this way, Tennessee, Indiana, and Florida are in the best shape, even though they don’t look good in the Reason report.

Let’s conclude by seeing what states are in the top-10 and bottom-10 of both reports.

On this basis, the best states are South Dakota, Utah, Wisconsin, and Nebraska.

The worst states (to nobody’s surprise) are New Jersey, Connecticut, Illinois, Hawaii, and Mississippi.

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Is Iowa Becoming the “Florida of the North”?

According to both Economic Freedom of North America and Freedom in the 50 States, Iowa is boringly average, ranking in the 20s.

That’s better than being terrible, like New York or California. But it’s worse than being good, like Florida and New Hampshire.

However, if we look solely at tax policy, Iowa goes from average to bad, ranking #38 according to the Tax Foundation’s State Business Tax Climate Index.

I suspect, though, that future editions will show Iowa climbing much higher. Both in the overall ratings and in the rankings for tax policy.

That’s because Iowa lawmakers are enacting big reforms. I’ve written about two of the major changes.

• Replacing a discriminatory tax code with a simple and fair flat tax.
• Breaking the government education monopoly with universal school choice.

I’m not the only one to notice.

Here are some excerpts from a National Review column by John Hendrickson and Vance Ginn.

Governor Kim Reynolds has made Iowa a leader in conservative fiscal policy. This approach has already left more money in taxpayers’ pockets, and set the state on course to implement a low, flat income tax… Last year, Governor Reynolds and the Iowa legislature continued to place a priority on prudent budgeting. The $8.2 billion budget for fiscal year 2023 represented a mere 1 percent increase from the prior year. And for FY 2024, Reynolds has proposed an $8.5 billion budget, with the extra funds meant to cover the universal school-choice plan that the legislature recently passed. …In 2022, Iowa also enacted the most comprehensive income-tax-reform package in the nation. Over four years, the nine-bracket income tax will transform into a flat income tax with a 3.9 percent rate. The corporate tax has also already been reduced from 9.8 percent to 8.4 percent, and is set to gradually shrink until it reaches a flat 5.5 percent rate. …Currently, Iowa has 37 cabinet agencies. The governor’s proposal calls for a 16-agency cabinet. She argues that government is both too big and too expensive, and streamlining it will result in more efficiency.

The Washington Post also has noticed, though from a disapproving perspective.

Here’s some of what Annie Gowen wrote earlier this year.

Republicans in the Iowa legislature, empowered by the state’s recent “red wave,” have embarked on an ambitious new agenda… A joke among statehouse reporters is that Iowa is becoming the “Florida of the North” — without the beaches. …With a new school-choice-friendly majority in place, an expanded version of the legislation passed easily in January. When fully implemented, it will allow all Iowa families to use taxpayer-funded “education savings accounts” for private school tuition… “the message the Democrats are using is not the message the average Iowans want to hear,” said state Rep. John H. Wills (R), who helped shepherd the governor’s school choice bill through the legislature.

Oddly, the article does not mention the state’s tax reform or spending restraint.

Let’s close with another National Review column, this one authored by Chris Ingstad and John Hendrickson.

Here are the most relevant passages.

Iowa may rightfully lay claim to being the standard-bearer for conservative, state-based public policy, as no other state has matched what Reynolds and the Iowa legislature have accomplished… Under Reynolds’s leadership, Iowa enacted…universal education savings accounts (ESAs) that will be available to every Iowa student, a bill that reorganized and shrank the size of state government, multiple rounds of income-tax cuts that have reduced the top tax rate by almost 60 percent… The Iowa model demonstrates not only that federalism works, but that applying the same principles to national policy will help restore constitutional government. …These policies are actually improving lives. The impact of three rounds of income-tax cuts has provided Iowa’s largest employers with the confidence to continue hiring and expanding their operations. …For families, 2023’s landmark Students First Act created universal ESAs and is one of the most expansive school-choice policies in the nation. It already is proving to be extremely popular: Nearly 19,000 students will benefit from true educational freedom this fall, with more applications still being considered.

In addition to highlighting good reforms in Iowa, Ingstad and Hendrickson also use the opportunity to promote federalism.

The United States may not have the same degree of decentralization as Switzerland, but states still have some ability to control their own economic destiny by limiting the burden of government.

Iowas has taken advantage of that ability.

P.S. Even the left-leaning OECD acknowledges that federalism produces good outcomes.

P.P.S. I’ve previously cited North Carolina as an example of a state that has engaged in bold reform.

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The Slow-Motion Suicide of New York and California

Two of the worst states for tax policy are California and New York.

They have punitive income tax rates, high sales taxes, and myriad other ways of diverting money from the productive sector of the economy to finance bloated public sectors.

I’ve written several time that greedy politicians in these states are driving away taxpayers. Simply stated, successful people are “voting with their feet” and choosing to move to states with lower tax burdens.

Especially states with no income taxes.

But it’s not just people that are moving. As shown by these maps, money is also escaping from California and New York.

The above map comes from Linly Lin and Tom Maloney, who wrote a column for Bloomberg about money-management firms fleeing high-tax states.

Here are some excerpts from their report.

The drip, drip, drip of the finance industry’s exit from New York and California has been measured anecdotally… Elliott Management decamped to West Palm Beach. AllianceBernstein to Nashville. Charles Schwab moved to suburban Dallas. Now, for the first time, there are hard numbers quantifying the exact scope of the exodus. Both states have in the past three years lost firms that managed close to $1 trillion of assets…The exodus from the Northeast and West Coast has meant the loss of thousands of high-paying jobs, straining city and state finances by sapping tax revenue. …The moves, often born out of a desire for lower taxes, …spurring plenty of angst in the places left behind… From the start of 2020 through the end of March 2023, more than 370 investment companies — about 2.5% of the US total, and managing $2.7 trillion in assets — moved their headquarters to a new state. The vast majority of the migration was out of high-cost-of-living locales in the Northeast and on the West Coast and into Florida, Texas and other Sun Belt refuges.

Here’s another map from the column.

In this case, the authors look at how Texas and Florida are the main beneficiaries of America’s internal money migration.

By the way, I think taxes play a much bigger role than weather.

Nobody moves from California to Texas for the climate. Meanwhile, it’s possible that weather helps to explain the big shift from New York to Florida, but keep in mind that most people find Florida summers just as unpleasant as New York winters.

I’ll close by noting that red states have been outperforming blue states, and this Bloomberg data is another piece of powerful evidence to add to our collection.

P.S. My series on Texas vs California and Florida vs New York  also show the superiority of low taxes compared to higher taxes. Maybe, just maybe, there’s a lesson to be learned.

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The Best and Worst States to Create a Small Business

Americans can see how their states rank for overall economic liberty.

• Economic Freedom of North America.
• Freedom in the 50 States.
• Report on Economic Freedom.

They can also see how states rank for fiscal policy.

• State Business Tax Climate Index.
• Fiscal Policy Report Card on America’s Governors.

Today let’s look at how various states rank based on whether they are good places to create a small business.

Unsurprisingly, having no state income tax helps, but that is just one variable. It is also very important to have modest fees.

The top three states are Wyoming, Florida, and South Dakota.

Here’s some discussion of the ratings, including methodology.

Brand new research conducted by small business advice company Venture Smarter reveals the best and worst states to startup an LLC. The experts have indexed all 50 U.S states (plus DC), ranking each against six factors necessary for starting up an LLC, to receive a score out of 100. …Rankings are based on factors including LLC annual fees, LLC filling fees, average LLC agreement bid costs (from professional in States required to have one), advertising and publishing costs, tax climate index scores, and number of small businesses per 100K residents.

And which states are worst?

California is in last place, followed by New York and Delaware.

I’m somewhat surprised to see a very bad score for Delaware.

The state is famous, after all, as a tax haven for companies. I wonder if this is a case of the state charging high fees because it actually provides high value?

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Blue-to-Red Migration, Part III: The Slow-Motion Suicide of High-Tax States

In Part I and Part II of this series, we looked at how taxpayers are moving from high-tax states to low-tax states.

For Part III, let’s start with a map from the Tax Foundation, which shows which states are winning and losing as Americans vote with their feet.

People moving is only part of the story. We also need to look at who is moving.

That can have major implications for a state’s long-run competitiveness. Or even its fiscal viability.

Here are some excerpts from a column I wrote for Bloomberg.

States want to make sure they attract—or at least don’t lose—rich people. Upper-income taxpayers pay a disproportionate amount of taxes (just like they pay the lion’s share of federal taxes), and states that attract such residents are fiscal winners. …IRS data shows that high-tax states such as California, New York, and Illinois are losing tens of thousands of successful residents to low-tax states, with zero-income-tax Florida being a preferred destination. But what really matters from a fiscal perspective is that those tens of thousands of people leaving higher-tax states account for tens of billions of dollars of taxable income. This is a dangerous trend for the nation’s high-tax states. Simply stated, a government needs an acceptable ratio of people pulling the wagon versus those riding in the wagon. Otherwise, as former British Prime Minister Margaret Thatcher famously warned, they’ll “run out of other people’s money.” …high-tax states…face a grim future as more and more taxpayers do a cost-benefit analysis and decide whether they get enough value from government to justify punitive income tax rates (topping out at more than 10 percent in California, New York, and New Jersey). Based on current trends, expect a growing number of those taxpayers to “vote with their feet.”

The Tax Foundation study cited above, authored by Katherine Loughead, has some sobering data showing how interstate migration creates winners and losers.

The IRS data also show interstate migration broken down by AGI level. Among taxpayers with $200,000 or more in AGI, the top destinations for inbound interstate moves were Florida, Texas, Arizona, North Carolina, and South Carolina. Meanwhile, the states that saw the largest losses of taxpayers with $200,000 or more in AGI were New York, California, Illinois, Massachusetts, and Virginia. Several of the states losing higher-income taxpayers, especially New York, California, and New Jersey, have highly progressive tax codes under which tax liability rises steeply with income. States that structure their tax codes in this manner have consistently lost higher-income residents to lower-tax states, and not only the residents, but also any associated tax revenue and entrepreneurial activity that goes along with them.

Let’s close with a look at how California is a big net loser.

A TV station in Los Angeles, KTLA, reports on how the state is suffering from an exodus of people who are net tax-payers.

For the third straight year, the state of California has experienced a decline in population, according to U.S. Census Bureau data, and many of those packing up and heading east are some of the state’s wealthiest. A study of IRS Migration Data by an online real estate portal found that no state experienced a larger loss of tax income from migration than California. The study, conducted by MyEListing.com, found that California lost more than $340 million in 2021 IRS tax revenue due to residents moving. …“Despite its numerous attractions … beautiful landscapes and cultural richness, California’s high personal income tax rates seem discouraging for many high-wealth individuals. This, coupled with the state’s high cost of living, will likely fuel a wealth migration out of California,” the website wrote in its analysis. California is the entertainment capital of the world as well as home to Silicon Valley, but it appears some of the highest earners no longer need to keep their California residency to maintain their careers and businesses.

I’ll conclude by emphasizing that a state can get in fiscal (and economic) trouble if it drives away net tax-payers and attracts net tax-consumers.

As I wrote for Bloomberg, it is not a good idea to have lots of people riding in the wagon and too few people pulling the wagon. That’s bad for states, and it’s bad for nations.

P.S. While California does not have a very encouraging fiscal outlook, it is not the state viewed as most likely to go bankrupt.

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Blue-to-Red Migration, Part II

In Part I of this series, I shared some excerpts from a Wall Street Journal editorial that documented how taxpayers fleeing high-tax states such as California, New York, Illinois, and New Jersey.

Where are they going? In many cases, they are moving to zero-income-tax states such as Florida and Texas or flat-tax states such as Arizona and North Carolina.

This is not a new phenomenon. I first started writing about tax-motivated migration in early 2010.

And I suspect there will be many future columns, particularly since an impressive number of states have been improving their tax systems.

For Part II in this series, let’s look at some excerpts from an article by Patrick Villanova for Yahoo!Finance. Here are some excerpts.

When a state loses more high-earning tax filers than it gains in a given year, tax revenues may decline and the state’s fiscal situation may worsen. That’s why despite making up less than 7% of total tax returns filed across the 50 states and the District of Columbia in 2020, the migration patterns of high-earning households continue to make headlines. With this in mind, SmartAsset set out to identify the states with the most movement of high-earning households. To do this, we examined the inflow and outflow of tax filers making at least $200,000 in each state between 2019 and 2020. …There are nine states in the country that do not tax income at the state level. Four of those states – Florida, Texas, Tennessee and Nevada – are among the 10 places with the largest net inflow of high-income households. …No state is gaining more high-earning households than Florida…a net addition of 20,263 high-income filers. Like Florida, Texas – the No. 2 ranking place – does not have state income tax. …It’s no surprise that most of the states with the highest net losses of households earning over $200,000 are traditionally viewed as high-tax states. New York saw a net outflow of nearly 20,000 high-earning households in 2020, more than any state in our study. …California wasn’t far behind, losing a net figure of 19,229 high-earning filers.

This is a story about people “voting with their feet,” but there are also very important implications for state finances.

Every state has people who pay taxes (workers and businesses in the private sector) and people who consume taxes (bureaucrats, welfare recipients, interest groups, etc).

However, if a state is losing the former and retaining (or even attracting) the latter, that’s a recipe – sooner or later – for Greek-style fiscal trouble.

Which is why I have sometimes speculated that states such as California are committing slow-motion suicide.

P.S. Switching to a different topic, the article notes that, “D.C. has the largest proportion of high-earners… Households earning at least $200,000 per year make up 12.19% of all tax filers in the District of Columbia.” Unfortunately, this is not a sign that DC has good fiscal policy. Indeed, the opposite is true. What it does show is that it is very lucrative to be a bureaucrat, lobbyist, politician, or some other type of “beltway bandit.” The only solution to this problem is to shrink the size and scope of the federal government.

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The Feel-Good Map of 2023

Last year, I shared the “Feel-Good Map of 2022” that showed 18 states had lowered personal and/or corporate income tax since the start of 2021.

And that was after showing a map of 11 state lowering tax rates the previous year.

Courtesy of the Tax Foundation, we now have the 2023 version of that map. As you can see, more than half the states (27 if I can count correctly) have now joined the tax-cutting club.

This map does not even capture all the good news.

• Some states can’t lower tax rates because they wisely don’t have income taxes.
• Some states not only lowered tax rates, but also shifted to simpler and fairer flat taxes.

But there also is a bit of bad news.

A small handful of states have raised tax rates. That’s a very foolish approach when other states are making their systems more competitive.

But I guess we should not be surprised to see bad fiscal policy from California, the District of Columbia, and Massachusetts (and I believe the map is mistaken and New York also belongs to that ignoble group).

P.S. While the above map is good news, some of the progress is for a bad reason. States have been able to lower tax rates in part because Trump and Biden squandered so much money during the pandemic. Much of that new spending was transfers to state governments. In many cases, state politicians used the transfers to increase spending. But the silver lining to that dark cloud is that many states also lowered tax rates.

P.P.S. Another feel-good map, once it is updated, is what’s happening with school choice at the state level.

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Nebraska Joins the Tax-Cutting Wave

Other than doing very well in rankings of state pension debt (see here, here, and here), I’ve never had any reason to notice public policy in Nebraska.

That changes today because the Cornhusker State has – like about two dozen other states – lowered income tax rates.

The widespread shift to better state tax policy is a very positive development, second only to the really great news about school choice.

Let’s take a closer look about the good news from Nebraska.

The Wall Street Journal editorialized about the state’s new tax changes, including some special attention for the improvements in business taxation.

The gulf between high- and low-tax states keeps growing, and Nebraska is the latest to use budget surpluses to cut income and property taxes—and in a big way. …An income-tax cut will bring the top rate down to 3.99% from 6.64% by 2027, and a separate cut will slash the corporate tax to the same 3.99% rate from 7.25% today. …A two-year term limit for legislators has helped produce crops of increasingly market-friendly lawmakers. Interstate competition has also kept the tax pressure on. …neighboring Missouri cut its top rate on income to 4.95%, and Iowa followed up its recent flat-tax plan with additional cuts to property taxes. …More than half of all states have reduced their income-tax rates since 2021… Fewer states have cut corporate rates. In slashing its tax on businesses, Nebraska will leapfrog its neighbors to boast the lowest rate in the region after zero-tax South Dakota and Wyoming.

Kudos to Nebraska. They’ve moving from Column 4 to Column 3 in my state tax ranking.

The next step hopefully will be a flat tax.

P.S. Some state tax cuts are hardly worthy celebrating.

P.P.S. Massachusetts and Washington are among the few states moving in the wrong direction.

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School Choice Is Great for Students, but It’s also Good for Taxpayers

School choice is a great idea because it will lead to dramatic improvements in education.

But there is also a secondary benefit. Because of inherent waste and inefficiency, government schools are more costly. So adoption of school choice also can produce savings for taxpayers.

Defenders of the status quo, such as teacher unions and their allies, are claiming otherwise. This has become a big talking point for the left in Arizona, which is hoping to undermine the the statewide school choice plan enacted in 2022.

So, in a column for the Wall Street Journal, Jason Bedrick and Corey DeAngelis debunk the silly claim that the state’s school choice system will increase the burden of government spending.

Is school choice bankrupting Arizona? …With an ESA, parents can use a portion of their child’s state education funds—typically about $8,000 a year—to pay for private-school tuition …the Arizona Department of Education’s latest projection that the program, which has about 58,000 participants, will serve 100,000 students by the end of fiscal 2024 at a cost of roughly $900 million. …Arizona public schools spend about $14,000 per pupil, or $1.4 billion for 100,000 students. If the department’s enrollment projection is reached, school choice would serve roughly 8% of Arizona’s students for 6% of the $15 billion that Arizona will spend on public schools.

Needless to say, you don’t need to be a math genius to recognize that taxpayers save money by spending $8,000 per pupil rather than $14,000 per pupil.

By the way, this issue is not limited to Arizona. Here’s a tweet exchange showing that reformers are having to debunk the same arguments in Georgia and Texas.

I’ll close by reiterating that school choice should be pursued to improve educational outcomes. That is – far and away – the most important reason to break up the government school monopoly.

The good news for taxpayers is just a fringe benefit.

P.S. The multi-state adoption of school choice in recent years is great news, especially to those of us who have spent our adult lives watching Democrats throw good money after bad and watching Republicans throw good money after bad.

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Minnesota’s Risky Experiment

Give Minnesota politicians credit for consistency. Their policies have Minnesota ranked #39 in both Economic Freedom of North America and Freedom in the 50 states.

Those are ratings for overall economic freedom.

When looking specifically at fiscal policy, the state is in even worse shape.

The Tax Foundation calculates that Minnesota is only #45 in the State Business Tax Climate Index.

And the state’s governor, Tim Walz, received a failing grade in the Fiscal Policy Report Card on America’s Governors.

All things considered, Minnesota is not in good shape. That being said, it’s always possible to go downhill.

That will probably happen because the left this year is using Minnesota as a laboratory for statist economic policies.

Here’s some right-of-center analysis from the editors of National Review.

Minnesota has long been liberal, but with a frequently divided government that kept its radicalism tethered. …2022 was hardly a sweeping mandate. …The state senate went from a 34–33 Republican majority to a 34–33 DFL majority. On that slim basis, the DFL set out to turn the state overnight into a frozen California. The legislature, with the eager connivance of Governor Tim Walz, voted routinely in partisan lockstep to enact a wish list of left-wing radicalism. …a massive budget spree, blowing in a single session Minnesota’s $17.5 billion surplus, most of it on spending and the rest on one-time “tax rebates” that will do nothing to improve the state’s tax climate going forward. The state’s $72 billion budget increases spending by 38 percent over 2022 levels, plus $2.6 billion in additional infrastructure spending that is heavily financed by debt. Pricey new programs were created, such as free public college (subject to a means test), universal free breakfasts and lunches for all students, up to twelve weeks of state-financed family and medical leave, expanded free-housing vouchers, and free menstrual products in schools. …Taxes on most Minnesotans will be going up to pay for all this. Gas taxes will be hiked by as much as five cents a gallon over the next four years. Sales taxes will increase by one percentage point. A payroll tax will be added to finance the family- and medical-leave program.

Not everyone is unhappy about these developments.

Here’s a left-of-center perspective from E.J.Dionne of the Washington Post. He cites many of the same policies, but he argues that the state is moving in the right direction.

The avalanche of progressive legislation that the state’s two-vote Democratic majority in the Minnesota House and one-vote advantage in the state Senate have enacted this year is a wonder to behold. …former president Barack Obama tweeted recently: “If you need a reminder that elections have consequences, check out what’s happening in Minnesota.” …while a two-year budget surplus of $17.5 billion set expectations “very high” for what could be done, $10 billion of it was “one-time money,” meaning that programs had to be funded and revenue raised for the long term. …What makes Minnesota’s experience this year unusual? State Democratic leaders said in interviews that as soon as they learned in November that they would have their first trifecta in a decade — meaning control of both chambers and the governorship — they decided they would not hold back to calculate the politics of every move.

So who is right, National Review of Mr. Dionne?

Regular readers won’t be surprised to learn that I agree that it is a mistake to turn Minnesota into a “frozen California.”

There are plenty of states with better tax policy, including neighbors with no income tax (South Dakota) or low-rate flat taxes (Iowa), so I expect we will see an increase in the rate of out-migration.

And if the productive people want warm weather as well, there are even more zero-tax options (Texas, Florida, etc) and flat-tax options (Arizona, North Carolina, etc).

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More Great News on School Choice

Is this the year of school choice or the decade of school choice? The answer is yes to both. Look at the statewide school choice plans that have been recently enacted.

• West Virginia in 2021
• Arizona in 2022
• Iowa in 2023
• Utah in 2023
• Arkansas in 2023
• Florida in 2023

Now we can add Indiana to the list.

The Wall Street Journal has a celebratory editorial about the big news from the Hoosier State.

…the latest good news comes from Indiana. Hoosier lawmakers passed the state budget last week, and it expands the school voucher program so nearly all students will be eligible. …The new law raises the income cap to 400% of the free- and reduced-price lunch income level, which is now about $220,000 for a family of four. The bill also removes the other criteria for eligibility so that any family under the income limit can apply. …“We would say it’s universal,” Betsy Wiley of the Institute for Quality Education told the Indiana Capital Chronicle. Early estimates suggest only 3.5% of families with school-age children in Indiana would not be eligible for the program under the new income limit… The principle at work here is that taxpayer education money for grades K-12 should follow the child, rather than school districts.

The new law doesn’t provide school choice to every family, but I’ll take a victory that provides choice to more than 96 percent of children.

This is great news for education.

What’s especially amusing is that this progress almost certainly would not have occurred if it was not for teacher unions. They got too arrogant and their leftist agenda has now backfired.

P.S. I can’t wait to see what this map looks like next year.

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The Negative Economic Effects of State Death Taxes

I’ve written many times about the harmful consequences of the federal death tax. Simply stated, it is both immoral and foolish for the IRS to grab as much as 40 percent of someone’s assets simply because they die.

That drains private capital from the economy and is a de facto heavy tax on those who save and invest (triple or quadruple taxation!).

That’s the bad news.

The worse news is that some states augment the damage with their own death taxes. Here’s a map from the Tax Foundation showing which states shoot themselves in the foot.

For those curious, the estate tax is imposed on the dead person’s assets and an inheritance tax is imposed on the the people who inherit the dead person’s assets.

In both cases, it’s bad news.

How bad?

There’s some new research from a couple of scholars examining this topic. Enrico Moretti of Berkeley and Daniel J. Wilson of the San Francisco Federal Reserve have a study published by the American Economic Journal that quantifies the impact of state death taxes on location choices.

In this paper, we contribute to the literature on the effect of state taxes on the locational choices of wealthy individuals by studying how estate taxes affect the state of residence of the American ultra-rich and the implications for tax policy. …Specifically, we estimate the effects of state-level estate taxes on the geographical location of the Forbes 400 richest Americans between 1981 and 2017. We then use the estimated tax mobility elasticity to quantify the revenue costs and benefits for each state of having an estate tax. We find that billionaires’ geographical location is highly sensitive to state estate taxes. Billionaires tend to leave states with an estate tax, especially as they get old. …On average, estate tax states lose 2.35 Forbes 400 individuals relative to non–estate tax states. …—21.4 percent of individuals who originally were in an estate tax state had moved to a non–estate tax state, while only 1.2 percent of individuals who originally were in a non–estate tax state had moved to an estate tax state. The difference is significantly more pronounced for individuals 65 or older… Overall, we conclude that billionaires’ geographical location is highly sensitive to state estate taxes. …We estimate that tax-induced mobility resulted in 23.6 fewer Forbes 400 billionaires and $80.7 billion less in Forbes 400 wealth exposed to state estate taxes.

What makes the study especially persuasive is that state death taxes suddenly no longer could be offset against federal death taxes because of a policy change in 2001.

That meant post-2001 data should look different. And that’s exactly what the authors found, as illustrated in Figure 6 of the study.

Here are some final excerpts from the conclusion.

The 2001 federal tax reform introduced stark cross-state variation in estate tax liabilities for wealthy taxpayers. Our findings indicate that the ultra-wealthy are keenly sensitive to this variation. Specifically, we find that billionaires responded strongly to geographical differences in estate taxes by increasingly moving to states without estate taxes, especially as they grew older. Our estimated elasticity implies that $80.7 billion of 2001 Forbes 400 wealth escaped estate taxation in the subsequent years due to billionaires moving away from estate tax states.

By the way, the study said that most states still wind up collecting net revenue because of death taxes.

In other words, the death tax revenue from remaining rich people is generally greater than the foregone income tax revenue because of those who left.

But I wonder if those findings would be true if the authors had been able to measure the secondary effects such as lost sales tax revenue, lost property tax revenues, and (perhaps most important) lost income tax revenue from people who did business with escaping rich people.

But, regardless of the findings, it is always immoral and wrong for politicians to impose taxes simply because someone dies.

P.S. In Australia, people changed when they died because of the death tax.

P.P.S. In France, people changed who they were because of the death tax.

P.P.P.S. In Ireland, people pretended to change their sexual orientation because of the death tax.

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