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Posts Tagged ‘States’

Experts in the field of political marketing periodically tell me that you need to have sympathetic victims when trying to change policy.

That’s probably good advice. When people have real-world examples – especially ones they can relate to – that presumably helps them understand the need for a reform.

I have to admit, however, that my approach is generally more wonky. Whether I’m meeting with a policymaker, giving a speech, or writing a column, I view my role as trying to help people understand one or more basic economic concepts (the importance of lower marginal tax rates, for example).

I think there’s value in my approach (if people grasp an underlying principle, that can impact their understanding of both current and future policy fights). But there’s no reason why I shouldn’t do both.

So I’m going to begin today’s column about occupational licensing (when state governments impose restrictions and regulations that limit who can work in a particular field) with a sympathy-eliciting example that hopefully will resonate with readers.

Consider what happened in New York City recently now that bureaucrats have decided that people couldn’t be dog sitters without going through all the red tape to become a licensed kennel.

Pet lovers are barking mad over a little-known city rule that makes dog-sitting illegal in New York. Health Department rules ban anyone from taking money to care for an animal outside a licensed kennel — and the department has warned a popular pet-sitting app that its users are breaking the law. “The laws are antiquated,” said Chad Bacon, 29, a dog sitter in Greenpoint, Brooklyn, with the app Rover. “If you’re qualified and able to provide a service, I don’t think you should be penalized.” Bacon, a former zookeeper and wildlife researcher, signed up for the app to help make ends meet while he was between jobs, but did enough business that he now makes his living from it full-time.

Now that we’ve identified Mr. Bacon as our sympathetic example, let’s look at the broader issue of the government creating barriers to employment and entrepreneurship.

The health code bans boarding, feeding and grooming animals for a fee without a kennel license — and says those licenses can’t be issued for private homes. …at least two apartment residents were slapped with violations in November and December for caring for pets without a permit. Fines start at $1,000. “If you’ve got a 14-year-old getting paid to feed your cats, that’s against the law right now,” said Rover’s general counsel John Lapham. “Most places right now continue to make it easier to watch children than animals, and that doesn’t make any sense.”

By the way, that’s not an argument for regulating babysitting (the kind of nonsense you might find in California). Instead, it’s a reason why state governments shouldn’t be going overboard with licensing rules.

The Institute for Justice just released a study on licensing rules for jobs that generally employ lower-skilled individuals.

Occupational licensing is, put simply, government permission to work in a particular field. In the 1950s, about one in 20 American workers needed an occupational license before they could work in the occupation of their choice. Today, that figure stands at about one in four. Securing an occupational license may require education or experience, exams, fees, and more, and working without one can mean fines or even jail time. …Policymakers, scholars and opinion leaders left, right and center are increasingly recognizing that licensing comes with high costs—fewer job opportunities and steeper prices—and does little to improve quality or protect consumers. …Most of the 102 occupations are practiced in at least one state without state licensing and apparently without widespread harm. Only 23 of these occupations are licensed by 40 states or more.

The last section of that excerpt is critically important. Special interests argue that occupational licensing somehow protects people, yet we have real-world examples for all 102 professions of states that have zero licensing restrictions and we don’t have examples of people dying or being harmed because of unregulated florists or rogue cosmetologists.

And shouldn’t there be some evidence of societal benefit before government restricts economic freedom (the same argument I’ve used when analyzing OSHA)?

As you might imagine, some states are worse than others. Here’s a map showing the degree to which state politicians conspire with special interests to create cartels in various fields. Louisiana and Washington are the worst (based on number of licensed professions) and Wyoming and Vermont (yes, that Vermont) are the least onerous.

Having written about a horrible example of occupational licensing in DC, I’m surprised that the District of Columbia isn’t at the bottom of the rankings. Or Alabama.

Though I’m not surprised to see that Oregon is green.

Here’s the report’s accompany video.

If you liked that video, you can click here for another video on occupational licensing.

A column by Conor Friedersdorf in the Atlantic highlights some of the findings in the IJ study.

…in Connecticut, a home-entertainment installer is required to obtain a license from the state before serving customers. It costs applicants $185. To qualify, they must have a 12th-grade education, complete a test, and accumulate one year of apprenticeship experience in the field. A typical aspirant can expect the licensing process to delay them 575 days. …Occupational-licensing obstacles are much more common than they once were. “In the 1950s, about one in 20 American workers needed an occupational license before they could work in the occupation of their choice,” the report states. “Today, that figure stands at about one in four.”

And he points out that consumers and workers (those outside the cartel) are the victims.

These requirements…are at their most pernicious when they are both needless and most burdensome to the middle class, the working class, and recent immigrants to a society. The IJ report focuses its attention on these cases, surveying 102 lower-income occupations across all 50 states and the District of Columbia. It concludes that “most of the 102 occupations are practiced in at least one state without state licensing and apparently without widespread harm.” In other words, dropping many of those requirements likely wouldn’t do any harm. …Too often, occupational-licensing laws are less about protecting workers or consumers as a class than they are about protecting the interests of incumbents. Want to compete with me? Good luck, now that I’ve lobbied for a law that requires you to shell out cash and work toward a certificate before you can begin.

The Wall Street Journal also opined about IJ’s new report.

More than ever, the government requires Americans to get permission to earn a living. In the 1950s one in 20 workers needed a license to work; now about one in four do. The rules hurt the working poor in particular, but everyone suffers in states with the most licensing requirements… Hawaii’s prerequisites are the most grueling while Louisiana and Washington regulate the most professions, with both states requiring a license for 77 lower-income fields. …California has the most dysfunctional regime. Across professions, it has established “a nearly impenetrable thicket of bureaucracy” where “no one could” provide a “list of all the licensed occupations,” as one state oversight agency admitted last year. …The cost and time to obtain a license is no accident, as professional guild members sit on state licensing boards and reinforce the racket. They want to limit competition to keep prices high. …Stiff licensing requirements are often prohibitive for America’s working poor, keeping them trapped in low-wage, low-skill jobs. …Nationwide, licensing drives up prices by as much as $203 billion annually. The requirements also hurt consumers by restricting access to goods and services.

The WSJ editorial points out that both political parties are guilty of supporting these insidious cartels.

Here’s an example, from Reason, of Democrats behaving badly.

California Democrats prattle endlessly about helping the working poor, but their latest vote against a bill that would tangibly help financially struggling people shows that Democratic leaders are more interested in serving their real constituencies: state bureaucracies, unions and other interest groups that want to keep out the competition. …California has the nation’s highest poverty rates, according to a new U.S. Census Bureau standard that includes cost-of-living factors. A good starting place to address that problem is to chip away at unnecessary barriers to work. Trade groups, however, recognize that the best way to inflate their members’ pay is to raise the cost of entry for others—and the more fields regulated this way, the more it keeps poor people in the welfare lines. …Such concerns prompted even the Democratic Obama administration to call for far-reaching licensing reforms, yet California’s Democrats don’t even seem to understand the point of such efforts. Or maybe they just won’t let themselves understand the argument, given their political alliances.

And Reason also identifies a Republican behaving badly.

Otter is bending to the wishes of other special interests. In vetoing the licensing reform bill—a bill that would have done little more than reduce the number of hours of training before someone could be licensed to cut hair or apply makeup from 800 to 600—Otter said objections voiced by the state Board of Cosmetology and the State Board of Barber Examiners should overrule the majority of the state legislature. …”For years, Butch Otter has given great speeches about the need for a free economy and limited, constitutionally-based government,” said Wayne Hoffman, president of the Idaho Freedom Foundation, a free market think tank, in a statement about the two vetoes. “Yet once again, Gov. Otter has rejected sensible, conservative, bipartisan liberty-based legislation that would have put Idaho entrepreneurs back to work and would have protected constitutional rights of Idahoans.”

Let’s close with an image that is both amusing and sad. Amusing because it mocks government and sad because it’s true. It’s basically the cartoon version of something I shared last year.

P.S. Returning to the issue of political marketing, I actually do use real-world examples for some purposes. My Bureaucrat Hall of Fame is nothing but horror stories about specific government employees pillaging taxpayers. and my collection of honest leftists also is based on specific stories of statists inadvertently revealing something important.

P.P.S. Business permits at the local level also are akin to occupational licenses. Governments are making people pay to become entrepreneurs. Which oftentimes translates into painful lessons for young people about government greed.

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Time for a confession. My left-wing friends are correct. I’m an idiot.

Why?

Because I’m an anti-tax libertarian, yet I keep writing favorably about a provision that will raise my taxes. I’m talking specifically about the provision, currently in both the House and Senate tax plans, to eliminate the deduction for state and local income taxes (and maybe also property taxes, though the House proposal will retain deductibility for the first $10,000).

I think this distortion in the tax code is very bad policy and I hope the loophole is entirely eliminated (including the property tax deduction).

But as I look at all the provisions in both bills and speculate about the contours of a final agreement, it’s highly likely that the net result will be a tax hike on one of my favorite people – me!

Sigh. I’ve joked in the past that “it ain’t easy being libertarian,” but it will definitely hurt to put my money where my mouth is (and it reminded me why GOPers should have made tax reform a tax cut by including some spending restraint).

That being said, let’s remind ourselves why the deduction is a bad idea.

Citing the self-destructive example of a recent tax hike in Illinois, Andrew Wilford of the National Taxpayers Union points out that the deduction enables and encourages state and local politicians to impose higher taxes.

…eliminating SALT would…remove this incentive for local governments to overtax its citizens. … this incentive to hike taxes can prove significant enough to drive state policy. In Illinois, residents were forced to bear the burden of a 32 percent hike on their taxes because of the state’s unwillingness to tackle its growing pension funding problem. Tax increases did not solve this underlying spending problem, but it was politically expedient— in part because state lawmakers knew that the federal government would pick up part of the tab.

It also violates my ethical-bleeding-heart rule, as Brian Riedl explains in the New York Post.

Wealthy families are four times more likely to utilize SALT than other families. Only 24 million of 125 million tax filers earning under $100,000 take the deduction, typically lowering their taxes by $1,000. By contrast, 20 million of the 25 million filers earning over $100,000 take the deduction… In fact, half the savings accrue to the richest 5 percent of taxpayers — and in New York, half of the SALT savings go to families making over $500,000.

But I don’t want today’s column to fixate on the policy argument.

Instead, let’s look at whether voting to get rid of the deduction is electoral suicide for Republicans from high-tax states such as New York and California.

Looking at the situation in the Golden State, that’s certainly the argument from the folks at Vox.

Just three of the 14 California House Republicans went against leadership… Republicans in California clearly ran on cutting taxes — but this tax bill could raise taxes on their constituents. …it also sets up their constituents for more risk. Cutting the state and local tax deduction puts undue burden on the state’s budget… “At this point it looks like California Republicans are eager to lose their seats in 2018,” Tyler Law, a spokesperson for the Democratic Congressional Campaign Committee, said.

Though Kimberly Strassel of the Wall Street Journal has a more upbeat (if you’re a Republican) assessment. She starts by explaining how California GOPers were targeted.

The House GOP passed its tax-reform bill on Thursday, and special medals of valor go to the 11 of 14 California Republicans who voted in support. The lobbyist brigade had joined with Democrats to target the Golden State delegation, seeing it as their best shot at peeling off enough Republicans to kill the bill. The assault was brutal, dishonest and all-out. …Gov. Jerry Brown unleashed on state Republicans, calling them “sheep” for supporting an end to most state and local tax, or SALT, deductions, and sending them letters deploring the tax hit on residents of high-tax California. Minority Leader Nancy Pelosi accused them of “looting” the state. Her Senate counterpart, New York’s Chuck Schumer, warned of “political fallout” that would be “catastrophic.”

They fought back by arguing that the Democrats are the high-tax party.

What proved most effective, however, was the state Republicans’ willingness to go on offense and throw SALT in Gov. Brown’s face. California has the heaviest tax burden in the country and only just implemented a punishing new 12-cent-a-gallon-increase in its gasoline tax. Mr. McCarthy used the occasion to release a video pouncing on that hike and noting that “if Gov. Brown is worried about the tax burden, let’s make cutting [taxes] a federal and state project.” Other state Republicans ran with that message, even more bluntly. “Why punish the rest of the nation because California is stupid?” asked Rep. Duncan Hunter in a local TV interview. Even Rep. Darrell Issa, who voted “no” on Thursday (along with Dana Rohrabacher and Tom McClintock ), zapped a letter back to Gov. Brown, noting that if SALT had become a big issue, it was “a direct result of the tremendous weight that your misguided policies have put on California taxpayers.”

At the risk of sounding like a mealy-mouthed Washington apparatchik, I’m going to agree with both Vox and the Wall Street Journal.

The bottom line is that voting for tax reform probably does endanger GOP lawmakers from high-tax states, which is the message that the leftists at Vox are peddling in hopes of preserving the awful status quo.

But I want to close with the observation that enacting tax reform will improve the electoral outlook for blue-state Republicans even if it’s not necessarily good for current GOP incumbents.

That’s because voters in high-tax states will be much more likely to resist bad state tax policy if there’s no federal deduction to mitigate the burden.

And that means politicians in blue states will be under even greater pressure to lower tax rates rather than increase tax rates. If they don’t do the right thing, more and more taxpayers will escape, as the Wall Street Journal opines.

The liberal tax model is to fleece the rich to finance spending on entitlements and government programs that invariably grow faster than the economy and revenues. IRS data on tax migration show this model is now breaking down in progressive states as the affluent run for cover and the middle class is left paying the bills. Between 2012 and 2015 (the most recent data), a net $8.5 billion in adjusted gross income left New Jersey while $6.2 billion poured out of Connecticut—4% of the latter state’s total income. Illinois lost $13.6 billion. During that period, Florida with no income tax gained $39.3 billion in AGI. …As these state laboratories of Democratic governance show, dunning the rich ultimately hurts people of all incomes by repressing the growth needed to create jobs, boost wages and raise government revenues that fund public services. If the Republican House and Senate tax-reform bills follow through with eliminating all or part of the state and local tax deduction, progressive states will have an even harder time hiding the damage. They should be the next candidates for reform.

Indeed, the mere prospect of tax reform already is causing statists to rethink their approach.

Even in New Jersey.

The Republican tax reform…already it’s having a political impact in at least one high-tax, ill-governed state. Democrat Steve Sweeney, president of the New Jersey Senate, said last week that the GOP decision to eliminate the state and local tax deduction could throw a new tax increase on millionaires into doubt. …Excellent news. Making politicians in Trenton, Albany, Sacramento and Springfield nervous about raising taxes is one desirable outcome of tax reform. These politicians have been passing the burden of their tax-and-spend policies onto taxpayers in other states via the state and local deduction. If that goes away, Democrats will have to rethink their policies lest they drive from their states the affluent taxpayers who finance most of state government. …Here’s a radical idea: Cut taxes and make New Jersey more desirable for people to work and invest. Tax reform in Washington could also spur reform in the states.

If tax reform happens and the deduction for state and local taxes is eliminated, the left’s class-warfare agenda will become much less appealing – and much harder to implement.

And in that kind of environment, it should be much easier for Republican politicians to win votes.

For all intents and purposes, tax reform for Republicans could be like Obamacare for Democrats.

Allow me to explain. When Obamacare was enacted, I worried that it might be a long-term political victory for the left even though it was very painful for Democrats in the short run. Simply stated, voters in the future (and we’re now entering that future) would become more reluctant to vote for Republicans once they were hooked on the heroin of government dependency.

Federal tax reform would have a similar impact, except the GOP will be the long-run winners. Voters in high-tax states will be more reluctant to vote for Democrats once a $100 tax hike (for instance) actually costs $100. Which is why genuine tax reform is a win-win situation.

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I’ve written a couple of times to explain why the deduction for state and local taxes should be eliminated as part of pro-growth tax reform.

One of my main arguments, as I pointed out at the beginning of this interview, is that Republicans are generally unwilling to finance pro-growth tax changes by restraining government spending.

And since GOPers are too timid on spending, that means “revenue offsets” are needed to finance the good provisions in tax reform (assuming the goal is to make such changes permanent).

But this second-best approach can still be very good if the right loopholes are targeted.

In other words, wiping out the deduction is a good idea as a general principle, but it’s a very good idea in today’s environment since it would produce a lot of revenue to “offset” the cost of lowering tax rates and making our awful tax system less onerous. Plus, the deduction is unfair and inconsistent with principles of good policy.

Many organization point out that generating revenues by getting rid of the state and local deduction would be a win-win situation.

The National Taxpayers Union is not a fan.

…the provision departs from principles of sound tax policy and unwisely abets the behavior of high-tax states, enabling big government.

And the Heritage Foundation doesn’t like the loophole.

The deduction for state and local taxes creates winners and losers within states. Higher-income taxpayers win; lower-income taxpayers lose.

The Tax Foundation has weighed in.

The deduction favors high-income, high-tax states like California and New York, which together receive nearly one-third of the deduction’s total value nationwide.

Along with the American Enterprise Institute.

…repealing the state and local tax deduction would be an important move toward broadening the tax base.

Americans for Tax Reform also opposes the deduction.

…this deduction actually subsidizes upper income earners in high tax states.

And the Center for Freedom and Prosperity has a fact sheet with lots of data.

…nearly all filers (~99.7%) would likely benefit from a lower rate and increased standard deduction notwithstanding the loss of SALT.

National Review rejects the loophole.

Getting rid of state-tax deductibility is…good policy. …deductions mainly benefit higher-income households. …The federal government…should not use the tax code to encourage or discourage.

But the most powerful and persuasive evidence for getting rid of the deduction is that organizations favoring higher taxes and bigger government openly admit that the loophole encourages and enables bad policy (what they would call good policy) at the state and local level. You don’t have to believe me. Here are some passages from a report by the Center for Budget and Policy Priorities.

…with this deduction, higher-income filers are more willing to support state and local taxes. …Ending the SALT deduction would strain state budgets over time by making it harder for states and localities to raise…revenues… The GOP tax plan…would threaten many states’ ability to raise…revenue.

What’s amazing is that the report openly acknowledges that the deduction overwhelmingly benefits the wealthy, something that CBPP normally doesn’t like because of their support for class-warfare taxation.

But if one’s goal is bigger government, you acquiesce to reverse class warfare when it makes life easier for tax-aholic politicians in states such as CaliforniaConnecticutIllinoisNew York, and New Jersey.

The lesson for the rest of us, though, is that if CBPP thinks this preference for the rich is worth preserving, the rest of us should want it abolished.

Let’s close with some analysis that is compelling to me. Here’s what Ronald Reagan said when he tried to eliminate this odious loophole back in the 1980s.

P.S. I still prefer the first-best option of tax reform financed by spending restraint. If Republicans simply limited federal spending so it grew by 1.96 percent per year over the next 10 years, that would enable both a balanced budget and a $3 trillion tax cut. And that’s even with static scoring!

P.P.S. Back during the debate on tax reform in the 1980s, Reagan also opposed the VAT. Helps to explain why I admire the Gipper so much.

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Perhaps because there’s no hope for genuine Obamacare repeal and limited hope for sweeping tax reform, I’m having to look outside of Washington for good news.

I wrote the other day about the very successful tax reforms in North Carolina. So now let’s travel to the Midwest.

The Wall Street Journal‘s editorial page has a very upbeat assessment of Michigan’s turnaround, though it starts by noting that many states teach us lessons on what shouldn’t happen.

…states can provide instructive policy lessons for better and sometimes worse—see the fiscal crack-ups in Connecticut and Illinois.

I definitely agree about the fiscal disasters of Connecticut and Illinois. And Michigan used to be in that group.

Former Michigan Democratic Gov. Jennifer Granholm was a progressive specialist in using the tax code to politically allocate capital, which depressed and distorted business investment. Between 2002 and 2007, Michigan was the only state to experience zero economic growth. …misguided policies were arguably bigger contributors to Michigan’s slump. Between 2002 and 2007, Michigan’s manufacturing grew at a third of the rate of the Great Lakes region. …In 2007 Democrats increased the state income tax to 4.35% from 3.9%. They also enacted a new business tax with a 4.95% tax on income, a 0.8% gross-receipts tax, plus a 21.99% surcharge on business tax liability. …Michigan’s economy plunged amid the national recession with unemployment hitting 14.9% in June 2009.

But Michigan has experienced a remarkable turnaround in recent years.

Michigan…offers a case study in the pro-growth potential of business tax reform. …Mr. Snyder’s first major undertaking with his Republican legislature was to replace the cumbersome state business tax with a 6% corporate tax and trim the individual rate to 4.25%. Michigan’s corporate-tax ranking jumped to seventh from 49th in the Tax Foundation’s business tax climate rankings. …They also reformed state-worker pensions. After the 2012 midterm elections, Republicans passed right-to-work legislation that lets workers choose whether to join unions. In 2014 state voters approved a ballot measure backed by the governor to repeal the personal-property tax for small businesses and manufacturers.

These reforms already are paying dividends.

In 2011 Michigan added jobs for the first time in six years, and it has since led the Great Lakes region in manufacturing growth. Unemployment has fallen below the national average to 3.9% even as the labor-force participation rate has ticked up. …Unemployment in the Detroit metro area has fallen to 3.2% from 11.4% six years ago. Businesses in Ann Arbor and Grand Rapids say they can’t find enough workers. Perhaps they should try recruiting in Chicago or New Haven.

As a fiscal wonk, I’m delighted by tax cuts and tax reform. That being said, I want to specifically focus on the reform of bureaucrat pensions in the Wolverine State.

It was mentioned as an aside in the WSJ editorial, but it may be even more important than tax changes in the long run. We’ll start with a short video the Mackinac Center produced to helped stimulate debate.

Here’s some of what Investor’s Business Daily wrote about the recent reforms.

We’ll start with a description of the problem that existed.

For years, Michigan had been racking up pension liabilities for public school teachers that it had no money to pay for. By 2016, the state’s unfunded liability had reached $29 billion — which meant state was funding only 60% of its pension obligations. …Michigan is hardly the only state to have made this mistake. Pressured by public sector unions, state lawmakers boosted retirement benefits, using wildly unrealistic forecasts for investment returns and wage growth to justify them.

And here are the admirable reforms that were enacted.

So what did Michigan do to avoid Illinois’ fate? It embraced bold pension reforms that will protect taxpayers and provide a solid retirement benefit to teachers. …it’s shifting its public school teachers toward defined contribution plans. All new hires will be automatically enrolled in a 401(k)-type plan with a default 10% contribution rate. Teachers will still be able to opt for a traditional defined benefit pension, but one that splits costs 50-50 between workers and the state, and includes safeguards that will prevent the funding ratio from dropping below 85%.

The experts at Reason also weighed in on the topic.

Pension analysts from the Reason Foundation (which publishes this blog and advocated for passage of SB 401) say no other state in the country has embraced reforms that go as far as Michigan’s. …new hires will be enrolled in a 401(k)-style pension plan, giving those workers the chance to control their own retirement planning while removing the threat of future unfunded liabilities. …What makes the Michigan proposal unique is it allows future hires to choose a so-called “hybrid” pension system retaining some elements of the old system with a provision requiring pension system to be shuttered if the gap between the fund’s liabilities and assets falls below 85 percent for two consecutive years. The mixed approach, allowing teachers to choose between a traditional pension and a 401(k)-style retirement plan, could be a model for other states to follow as they grapple with similar pension troubles.

Though the bill isn’t a panacea.

Paying down those obligations will take time—all current teachers and public school employees will remain enrolled in the current pension system and retirees will continue to collect benefits from it—but [it]…would make a big difference in the state’s long-term fiscal outlook.

Here’s a chart from the Mackinac Center showing how pensions became a growing problem. Unwinding this mess understandably won’t happen overnight.

But at least Michigan lawmakers took a real step in the right direction.

The same principle applies in Washington. Reforms to Medicare and Social Security wouldn’t change payments to existing retirees. And older workers generally would stick with the status quo.

But proposed entitlement reforms would lead to substantial long-run savings as younger workers are given the freedom to participate in new systems.

 

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Back at the end of April, President Trump got rolled in his first big budget negotiation with Congress. The deal, which provided funding for the remainder of the 2017 fiscal year, was correctly perceived as a victory for Democrats.

How could this happen, given that Democrats are the minority party in both the House and the Senate? Simply stated, Republicans were afraid that they would get blamed for a “government shutdown” if no deal was struck. So they basically unfurled the white flag and acquiesced to most of the other side’s demands.

I subsequently explained how Trump should learn from that debacle. To be succinct, he should tell Congress that he will veto any spending bills for FY2018 (which begins October 1) that exceed his budget request, even if that means a shutdown.

For what it’s worth, I don’t really expect Trump or folks in the White House to care about my advice. But I am hoping that they paid attention to what just happened in Maine. That state’s Republican Governor, Paul LePage, just prevailed in a shutdown fight with the Maine legislature.

Here are some details on what happened, as reported by CNN.

The three-day government shutdown in Maine ended early Tuesday morning after Gov. Paul LePage signed a new budget, according to a statement from his office.The shutdown had closed all non-emergency government functions, prompting protests from state employees in Augusta. …The key contention for the governor was over taxes. LePage met Monday afternoon with House Republicans and pledged to sign a budget that eliminated an increase in the lodging tax from 9 to 10.5 percent, according to the statement from the governor’s office. Once the lodging tax hike was off the table, negotiations sped up as the state House voted 147-2 and the Senate 35-0 for the new budget. “I thank legislators for doing the right thing by passing a budget that does not increase taxes on the Maine people,” said LePage in a statement.

And here are some excerpts from a local news report.

Partisan disagreements over a new two-year spending plan were finally resolved late Monday. The final budget eliminated a proposed 1.5 percent increase to Maine’s lodging tax – a hike that represented less than three-tenths of one percent of the entire $7.1 billion package but held up the process for days. …Gideon and other Democrats complained about the constantly-changing proposals being presented by House Republicans, who were acting as a proxy for LePage. Representative Ken Fredette, the House Minority Leader, insisted that his members were simply fighting back against tax hikes and making sure the governor was involved in the process. …Republicans in the Senate who, over the past several months, were able to negotiate away a three-percent income tax surcharge on high-income earners that was approved by voters last fall.

What’s particularly amazing is that Democrats in the state legislature even agreed to repeal a class-warfare tax hike (the 3-percentage point increase in the top income tax rate) that was narrowly adopted in a referendum last November.

This is a remarkable development. I had listed this referendum as one of the worst ballot initiatives of 2016 and was very disappointed when voters made the wrong choice.

So why did the state’s leftists not fight harder to preserve this awful tax?

One of the reasons they surrendered on that issue is that there was a big Laffer-Curve effect. Taxpayers with large incomes predictably decided to earn and report less income in Maine.

The moral of the story is that Maine’s Democrats were willing to give up on the surtax because they realized it wasn’t going to give them any revenue to redistribute. And unlike some DC-based leftists, they didn’t want a tax hike that resulted in less revenue.

Here are some passages from a report by the state’s Revenue Forecasting Committee.

The RFC has reduced its forecast of individual income tax receipts by $15.9 million in FY17, $40.3 million in the 2018-2019 biennium, and $43.9 million in the 2020-2021 biennium. While there was no so-called “April Surprise” to report for 2016 final payments in April, the first estimated payment for tax year 2017 was $9.3 million under budget; flat compared to a year ago. The committee had expected an increase of 25% or more in the April and June estimated payments because of the 3 percent surtax passed by the voters last November. … there is concern that high-income taxpayers impacted by the surtax may be taking some action to reduce their exposure to the surtax. The forecast accepted by the committee today assumes a reduction of approximately $250 million in taxable income by the top 1% of Maine resident tax returns and similarly situated non-resident returns. This reduction in taxable income translates into a total decrease in annual individual income tax liability of approximately $30 million; $10 million from the 3% surtax and $20 million from the regular income tax liability.

And here’s the relevant table from the appendix showing how the state had to reduce estimated income tax receipts.

But I’m getting sidetracked.

Let’s return to the lessons that Trump should learn from Governor LePage about how to win a shutdown fight.

One of the lessons is to stake out the high ground. Have the fight over something important. LePage wanted to kill the lodging tax and the referendum surtax. Since those taxes were so damaging, it was very easy for the Governor to justify his position.

Another lesson is to go on offense. Republicans in Maine explained that higher taxes would make the state less competitive. Here’s a chart they disseminated comparing the tax burden in Maine, New Hampshire, and Massachusetts.

And here’s another very powerful chart that was circulated to policy makers, showing the migration of taxpayers from high-tax states to zero-income-tax states.

Trump should do something similar. The fight later this year in DC (assuming the President is willing to fight) will be about spending levels. And leftists will be complaining about “savage” and “draconian” cuts.

So the Trump Administration should respond with charts showing that the other side is being hysterical and inaccurate since he’s merely trying to slow down the growth of government.

But the most important lesson of all is that Trump holds a veto pen. And that means he (just like Gov. LePage in Maine) controls the situation. He can veto bad budget legislation. And when the interest groups start to squeal that the spending faucet is no longer dispensing goodies because of a shutdown, he should understand that those interest groups feeling the pinch generally will be on the left. And when they complain, it is the big spenders in Congress who will feel the most pressure to capitulate in order to reopen the faucet. Moreover, the longer the government is shut down, the greater the pinch on the pro-spending lobbies.

In other words, Trump has the leverage, if he is willing to use it.

This assumes, of course, that Trump has the brains and fortitude to hold firm when the press tries to create a fake narrative about the world coming to an end, (just like they did with the sequester in 2013 and the shutdown fight that same year).

P.S. The only way Trump could lose a shutdown fight is if enough big-spending Republicans sided with Democrats to override a veto. That’s what happened in Kansas. And it may happen in Illinois. At this point, though, there’s no way that happens in Washington.

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I don’t know if Dr. Seuss would appreciate my title, which borrows from his children’s classic.

But given how I enjoy comparative rankings, I couldn’t help myself after perusing a new study from WalletHub that ranks states on their independence (or lack thereof).

Being a policy wonk, what really caught my attention was the section on government dependency, which is based on four criteria.

As you can see, the four factors are not weighted equally. The “federally dependent states” variable is considered four times as important as any of the other variables.

That’s important, to be sure, but is it really more important (or that much more important) than the other categories?

Moreover, I’m not sure the “tax freedom day” variable is a measure of dependency. What’s really captured by this variable, given the way the tax code doesn’t tax low-income people and over-taxes high-income people, is the degree to which state have lots of rich people or poor people. But that’s not a measure of dependence (particularly if the rich people stole money instead of earning it).

But I’m quibbling. I might put together a different formula with some different variables, but WalletHub has done something very interesting.

And if we look at their 25 least-dependent states, you see a very interesting pattern. Of the 10-most independent states, only three of them are Trump-voting red states (Kansas, Nebraska, and Utah).

The other seven are blue states. And some of them – such as Illinois, New Jersey, and California – are dark blue states.

And the #11 and #12 states also were Hillary states as well.

Which raises an interesting question. Why are voters in those states in favor of big government when they don’t disproportionately benefit from handouts?

Are they culturally left-wing, putting social issues above economic issues?

Or are they motivated by some issue involving foreign policy and/or defense?

Or maybe masochistic?

Beats me.

By the way, the WalletHub email announcing the report included a very interesting factoid that may explain why Hillary lost Pennsylvania.

Pennsylvania has the lowest percentage of government workers (local, state and federal), at 10.8 percent. Alaska has the nation’s highest percentage, at 25.1 percent.

Though I can’t see those details in the actual report, which is disappointing. I’d like to see a ranking of the states based solely on the number-of-bureaucrats criteria (we have data comparing countries, for those interested).

Now let’s shift to the states that have the highest levels of dependency.

If you look at the bottom of the final image, you’ll notice that it’s a reverse of the top-10. Seven of the most-dependent states are red states that voted for Trump.

Only New Mexico, Oregon, and Maine supported Hillary (and Trump actually won one-fourth of Maine’s electoral votes).

So this raises a separate question. Are red state people voting against their interests? Should they be voting for politicians who will further expand the size and scope of government so they can get even more goodies from Uncle Sam?

For what it’s worth, a leftist actually wrote a book entitled What’s the Matter with Kansas, which examined why the people of the Sunflower State weren’t voting for statism.

Well, part of the answer may be that Kansas is one of the most independent states, so perhaps the author should have picked another example.

But even if he had selected Mississippi (#49), I suspected the answer is that low-income people don’t necessarily think that it’s morally right to steal money from other states, even if the loot is laundered through Washington.

In other words, people is those states still have social capital or cultural capital.

It’s also possible, of course, that voters in red states with lots of dependency (at least as measured by WalletHub) are instead motivated by cultural issues or foreign policy issues.

There’s even a very interesting study from Professor Alesina at Harvard, which finds that ethnically diverse jurisdictions can be more hostile to redistribution (and homogeneous societies like the Nordic nations are more supportive of a large welfare state).

And since many of the red states at the bottom of the rankings also happen to be states with large minority populations, perhaps that’s a partial explanation.

Though California has a very large minority population as well, yet it routinely votes for more redistribution.

The bottom line is that we probably can’t draw any sweeping conclusions from this data.

Though it leaves me even more convinced that the best approach is to eliminate all DC-based redistribution and let states decide how much to tax and how much to spend. In other words, federalism.

P.S. I put together my own ranking of state dependency, based on a formula involving welfare usage and poverty. Vermont was the worst state and Nevada was the best state.

P.P.S. I also shared calculations based solely on the share of eligible people who signed up for food stamps. Interestingly, Californians rank as the most self-reliant. Maybe my predictions of long-run doom for that state are a bit exaggerated.

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Whenever I debate my left-wing friends on tax policy, they routinely assert that taxes don’t matter.

It’s unclear, though, whether they really believe their own rhetoric.

After all, if taxes don’t affect economic behavior, then why are folks on the left so terrified of tax havens? Why are they so opposed to tax competition?

And why are they so anxious to defend loopholes such as the deduction for state and local taxes.

Perhaps most revealing, why do leftists sometimes cut taxes when they hold power? A story in the Wall Street Journal notes that there’s been a little-noticed wave of state tax cuts. Specifically reductions and/or eliminations of state death taxes. And many of these supply-side reforms are happening in left-wing states!

In the past three years, nine states have eliminated or lowered their estate taxes, mostly by raising exemptions. And more reductions are coming. Minnesota lawmakers recently raised the state’s estate-tax exemption to $2.1 million retroactive to January, and the exemption will rise to $2.4 million next year. Maryland will raise its $3 million exemption to $4 million next year. New Jersey’s exemption, which used to rank last at $675,000 a person, rose to $2 million a person this year. Next year, New Jersey is scheduled to eliminate its estate tax altogether, joining about a half-dozen others that have ended their estate taxes over the past decade.

This is good news for affected taxpayers, but it’s also good news for the economy.

Death taxes are not only a punitive tax on capital, but they also discourage investors, entrepreneurs, and other high-income people from earning income once they have accumulated a certain level of savings.

But let’s focus on politics rather than economics. Why are governors and state legislators finally doing something sensible? Why are they lowering tax burdens on “rich” taxpayers instead of playing their usual game of class warfare?

I’d like to claim that they’re reading Cato Institute research, or perhaps studies from other market-oriented organizations and scholars.

But it appears that tax competition deserves most of the credit.

This tax-cutting trend has been fueled by competition between the states for affluent and wealthy taxpayers. Such residents owe income taxes every year, but some are willing to move out of state to avoid death duties that come only once. Since the federal estate-and-gift tax exemption jumped to $5 million in 2011, adjusted for inflation, state death duties have stood out.

I don’t fully agree with the above excerpt because there’s plenty of evidence that income taxes cause migration from high-tax states to zero-income-tax states.

But I agree that a state death tax can have a very large impact, particularly once a successful person has retired and has more flexibility.

Courtesy of the Tax Foundation, here are the states that still impose this destructive levy.

Though this map may soon have one less yellow state. As reported by the WSJ, politicians in the Bay State may be waking up.

In Massachusetts, some lawmakers are worried about losing residents to other states because of its estate tax, which brought in $400 million last year. They hope to raise the exemption to half the federal level and perhaps exclude the value of a residence as well. These measures stand a good chance of passage even as lawmakers are considering raising income taxes on millionaires, says Kenneth Brier, an estate lawyer with Brier & Ganz LLP in Needham, Mass., who tracks the issue for the Massachusetts Bar Association. State officials “are worried about a silent leak of people down to Florida, or even New Hampshire,” he adds.

I’m not sure the leak has been silent. There’s lots of data on the migration of productive people to lower-tax states.

But what matters is that tax competition is forcing the state legislature (which is overwhelmingly Democrat) to do the right thing, even though their normal instincts would be to squeeze upper-income taxpayers for more money.

As I’ve repeatedly written, tax competition also has a liberalizing impact on national tax policy.

Following the Reagan tax cuts and Thatcher tax cuts, politicians all over the world felt pressure to lower their tax rates on personal income. The same thing has happened with corporate tax rates, though Ireland deserves most of the credit for getting that process started.

I’ll close by recycling my video on tax competition. It focuses primarily on fiscal rivalry between nations, but the lessons equally apply to states.

P.S. For what it’s worth, South Dakota arguably is the state with the best tax policy. It’s more difficult to identify the state with the worst policy, though New Jersey, Illinois, New York, California, and Connecticut can all make a strong claim to be at the bottom.

P.P.S. Notwithstanding my snarky title, I don’t particularly care whether there are tax cuts for rich people. But I care a lot about not having tax policies that penalize the behaviors (work, saving, investment, and entrepreneurship) that produce income, jobs, and opportunity for poor and middle-income people. And if that means reforms that allow upper-income people to keep more of their money, I’m okay with that since I’m not an envious person.

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