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Posts Tagged ‘States’

The state of New York is an economic disaster area.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I’ll close with a few observations.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Kevin Williamson wrote an entire rebuttal for National Review.

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

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

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

Let’s conclude with some levity.

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

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

And here’s some clever humor from Genesius Times.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The final sentence is the above excerpt is especially insightful.

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

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

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

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

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

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

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

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

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

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

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

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

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

One obvious takeaway is to avoid Quebec and New York.

And almost all of Mexico as well.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Associated Press reports on the proposal.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Governor apparently forgot to also ban trucks.

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

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

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

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

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

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

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

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

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

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

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

 

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Back in July, I wrote a three-part series designed to identify the states with the greediest politicians.

The results sometimes matched expectations. Florida generally looked very responsible, for instance, while New York looked rather profligate.

But other results were mixed. In particular, Alaska and Wyoming have very good tax systems, but they use energy taxes to finance bloated public sectors.

Today, let’s build on that research by reviewing two new reports than rank state economic policy.

First, we have the American Legislative Exchange Council’s 2020 Report on Economic Freedom. It’s based on several factors, but I can’t help but notice that the 10-best-ranked states include five with no income tax and three with flat taxes.

If you look at the 10 states at the bottom of the rankings, by contrast, they almost all have so-called progressive taxes. The only exceptions are Alaska, which (as noted above) finances a big government with energy taxes, and Illinois, which has a flat tax that currently is under assault by the state’s big spenders.

Now let’s look at the Tax Foundation’s newly released State Business Tax Climate Index.

As you can see, the top 10 is dominated by states that either don’t tax income, or have flat taxes, and the one state (Montana) with a so-called progressive tax compensates by having no sales tax.

Every state in the bottom 10, meanwhile, has a discriminatory income tax.

The two reports cited above measure different things. But both use good data and rely on sound methodology, so it’s very interesting to see which states score well (and score poorly) in both.

The states that crack the top 10 in both reports are South Dakota, Florida, New Hampshire, Utah, and Indiana.

And the states that languish in the bottom 10 in both reports are Louisiana (they should have adopted Bobby Jindal’s plan when they had a chance) and New Jersey (not exactly a surprise).

P.S. I recently wrote about Chris Edwards’ Report Card on America’s Governors. So if we mesh those results (New Hampshire was in the top category while New Jersey was in the bottom category) with today’s results, the folks in the Granite State get the triple crown while the folks in the Garden State get a booby prize.

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One of the problems with state balanced budget requirements is that tax revenues are very sensitive to economic conditions.

Boom Years: When there’s robust economic growth, politicians collect unanticipated revenue because more people have good jobs and more businesses are earning money.

And what do politicians do when this happens? They spend a big chunk of that unanticipated tax revenue.

Bust Years: When there’s a recession and tax revenues unexpectedly decline, state politicians are in a tough position because they’ve made lots of promises to spend money, including for the extra spending that took place when the economy was growing.

And what do politicians do when this happens? They usually respond with a combination of spending cuts and tax increases.

This boom-bust budgeting is unwise for many reasons, but I don’t like it because it leads to a long-run expansion in the size of government (the spending increases in the boom years almost always are greater than the cutbacks in the bust years).

Indeed, one of the reasons why I prefer a spending cap instead of a balanced budget requirement is that you avoid this “ratchet effect.”

Now let’s look at some real-time data on why this matters. Given what’s happened with the coronavirus, we’re currently in a “bust year” and many governors and state legislators claim that they’re dealing with special conditions that necessitate a bailout from Washington.

In a column for the Wall Street Journal, Jonathan Williams of the American Legislative Exchange Council and Dave Trabert of the Kansas Policy Institute explore the topic.

Many governors now seek a federal bailout, but borrowing trillions more will only make matters worse for taxpayers… Every state provides the same basic services, but some do it at much lower cost, which allows them to have lower taxes. ……high-spending states are at the front of the line for a federal bailout. …Too many elected officials would rather have taxpayers submit to a tax increase now, or pay off bailout debt later, than do the hard work of eliminating unnecessary spending.

Their column includes plenty of hard data showing that the states clamoring for the bailouts wouldn’t be facing any fiscal problems if they weren’t spending so much money.

…The 41 states with an income tax spent 55% more per resident in 2018 than did the nine states without an income tax. Florida, which doesn’t have an income tax, spent the least, at $2,327 per resident. Texas and New Hampshire, also without income taxes, have the next lowest spending at $2,585 and $2,773, respectively. New Hampshire is frugal enough to avoid a sales tax. …New York, which has an income tax, spends $5,231 per resident. Gov. Andrew Cuomo threatens to cut services unless he gets a $60 billion bailout over two years. If New York spent at Florida’s level per resident, the Empire State would save $56.7 billion each year. If Illinois Gov. Jay Pritzker were to trim his state’s per resident spending to match Texas’, he would save his taxpayers $22.3 billion a year—and there would be no need for any income-tax increase. Gov. Gavin Newsom could save Californians $64.6 billion annually if his state matched New Hampshire’s spending.

Here’s the map that accompanied the column, showing per-capita spending levels in each state.

Earlier this year, I looked at state data, but also included spending by local governments.

But slicing the numbers in a different way doesn’t change the fact that some states spend much more (and without delivering more and/or better services).

Some people portray this as a battle of red states vs. blue states, but I prefer to avoid the politics and simply compare big-spending states to modest-spending states. For instance, compare New York and Florida. If that’s not enough, also compare Texas and California.

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I’ve written favorably about the pro-growth policies of low-tax states such as Texas, Florida, and Tennessee, while criticizing the anti-growth policies of high-tax states such as Illinois, California, and New York.

Does that mean we should conclude that “red states” are better than “blue states”? In this video for Prager University, Steve Moore says the answer is yes.

The most persuasive part of the video is the data on people “voting with their feet” against the blue states.

There’s lots of data showing a clear relationship between the tax burden and migration patterns. Presumably for two reasons:

  1. People don’t like being overtaxed and thus move from high-tax states to low-tax states.
  2. More jobs are created in low-tax states, and people move for those employment opportunities.

There’s a debate about whether people also move because they want better weather.

I’m sure that’s somewhat true, but Steve points out in the video that California has the nation’s best climate yet also is losing taxpayers to other states.

Since we’re discussing red states vs blue states, let’s look at some excerpts from a column by Nihal Krishan of the Washington Examiner.

States run by Republican governors on average have economically outperformed states run by Democratic governors in recent months. …Overall, Democratic-run states, particularly those in the Northeast and Midwest, had larger contractions in gross domestic product than Republican-run states in the Plains and the South, according to the latest state GDP data for the second quarter of 2020, released by the Commerce Department on Friday. Of the 20 states with the smallest decrease in state GDP, 13 were run by Republican governors, while the bottom 25 states with the highest decrease in state GDP were predominantly Democratic-run states. …Republican-controlled Utah had the second-lowest unemployment rate in the country in August at 4.1%, and the second-lowest GDP drop, at just over 18% in the second quarter. Nevada, run by Democrats, had the highest unemployment rate, at 13.2%. It was closely followed by Democratic-run Rhode Island, 12.8%, and New York, 12.5%.

Krishan notes that this short-run data is heavily impacted by the coronavirus and the shutdown policies adopted by various states, so it presumably doesn’t tell us much about the overall quality (or lack thereof) of economic policy.

I wrote about some multi-year data last year (before coronavirus was a problem) and found that low-tax states were creating jobs at a significantly faster rate than high-tax states.

But even that data only covered a bit more than three years.

I prefer policy comparisons over a longer period of time since that presumably removes randomness. Indeed, when comparing California, Texas, and Kansas a few years ago, I pointed out how a five-year set of data can yield different results (and presumably less-robust and less-accurate results) than a fifteen-year set of data.

P.S. What would be best is if we had several decades of data that could be matched with rigorous long-run measures of economic freedom in various states – similar to the data I use for my convergence/divergence articles that compare nations. Sadly, we have the former, but don’t have the latter (there are very good measures of economic freedom in the various states today, but we don’t have good historical estimates).

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According to the Fraser Institute’s calculations of overall economic freedom, Delaware apparently has the worst politicians and New Hampshire has the best ones.

According to comprehensive estimates of economic liberty in Freedom in the 50 States, New York’s politicians seem to be the worst and Florida’s are the best.

But what if we focus just on fiscal policy?

Earlier this year, I wrote three columns that illustrated different ways – income taxes, sales taxes, and government spending burden – of measuring the quality of state fiscal policy.

Today, let’s look at a comprehensive assessment of the nation’s governors, courtesy of Chris Edwards. Here’s his core methodology.

…this year’s 15th biennial fiscal report card on the governors…examines state budget actions since 2018. It uses statistical data to grade the governors on their tax and spending records—governors who have restrained taxes and spending receive higher grades, while those who have substantially increased taxes and spending receive lower grades. …Scores ranging from 0 to 100 were calculated for each governor on the basis of seven tax and spending variables. Scores closer to 100 indicate governors who favored smaller-government policies. 

Only four governors got the highest grade (and that’s using a curve!), led by Chris Sununu of New Hampshire.

Those of you who follow politics may be interested in knowing that Kristi Noem (R-SD) and Ron DeSantis (R-FL), both potential presidential candidates in 2024, got “B” grades. So good, but not great.

Now let’s look at the most profligate chief executives.

The worst of the worst is Jay Inslee of Washington. So however bad Biden’s agenda is for the country, let’s be happy that Governor Inslee didn’t win the Democratic presidential nomination.

I’m not surprised by the other “F” governors. Though I am surprised that Gov. Pritzker isn’t in last place, given his efforts to get rid of the the Illinois flat tax.

For what it’s worth, the best-ranked Democrat (a “B” grade) is Steve Sisolak of Nevada. I assume this means he hasn’t tried to ruin the state’s zero-income-tax status. The worst-ranked Republican (a “D” grade) is Bill Lee of Tennessee and his bad score is because of huge increases in the state spending burden.

Last but not least, Chris identifies a systemic problem impacting almost all states. Simply stated, government spending has been growing too rapidly, more than double what would be needed to keep pace with inflation.

General fund spending grew at an annual average rate of 4.1 percent between 2010 and 2020, including increases of 5.5 percent in 2019 and 5.8 percent in 2020.

Here’s the accompanying chart.

In the study, Chris says states should use “rainy day funds” to avoid boom-and-bust budgeting (in other words, set aside some revenue when the economy is growing so it’s not necessary to make big adjustments when there’s a recession).

That’s definitely a prudent approach, and the study points out that some blue-leaning states like California follow that policy, while others (most notably, Illinois) recklessly spent surplus revenue.

My two cents is that a spending cap is the best long-run solution, and Colorado’s TABOR is easily the best fiscal rule among the 50 states.

P.S. Governor Sununu of New Hampshire needs to continue getting good scores to atone for his father’s terrible role, as Chief of Staff for George H.W. Bush, in pushing through the failed 1990 tax increase.

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If you’re a curmudgeonly libertarian like me, you don’t like big government because it impinges on individual liberty.

Most people, however, get irked with government for the practical reason that it costs so much and fails to provide decent services.

California is a good example. Or perhaps we should say bad example.

The Tax Foundation recently shared data on the relative cost of living in various metropolitan areas. Looking at the 12-most expensive places to live, 75 percent of them are in California.

So what do people get in exchange for living in such expensive areas?

They get great weather and scenery, but they also get lousy government.

Victor Davis Hanson wrote for National Review about his state’s decline.

Might it also have been smarter not to raise income taxes on top tiers to over 13 percent? After 2017, when high earners could no longer write off their property taxes and state income taxes, the real state-income-tax bite doubled. So still more of the most productive residents left the state. Yet if the state gets its way, raising rates to over 16 percent and inaugurating a wealth tax, there will be a stampede. It is not just that the upper middle class can no longer afford coastal living at $1,000 a square foot and $15,000–$20,000 a year in “low” property taxes. The rub is more about what they get in return: terrible roads, crumbling bridges, human-enhanced droughts, power blackouts, dismal schools that rank near the nation’s bottom, half the nation’s homeless, a third of its welfare recipients, one-fifth of the residents living below the poverty level — and more lectures from the likes of privileged Gavin Newsom on the progressive possibilities of manipulating the chaos. California enshrined the idea that the higher taxes become, the worse state services will be.

Even regular journalists have noticed something is wrong.

In an article in the San Francisco Chronicle, Heather Kelly, Reed Albergotti, Brady Dennis and Scott Wilson discuss the growing dissatisfaction with California life.

California has become a warming, burning, epidemic-challenged and expensive state, with many who live in sophisticated cities, idyllic oceanfront towns and windblown mountain communities thinking hard about the viability of a place many have called home forever. For the first time in a decade, more people left California last year for other states than arrived. …for many of California’s 40 million residents, the California Dream has become the California Compromise, one increasingly challenging to justify, with…a thumb-on-the-scales economy, high taxes… California is increasingly a service economy that pays a far larger share of its income in taxes and on housing and food. …Three years ago, state lawmakers approved the nation’s second-highest gasoline tax, adding more than 47 cents to the price of a gallon. …service workers in particular are…paying far more as a share of their income on fuel just to stay employed. …A poll conducted late last year by the University of California at Berkeley found that more than half of California voters had given “serious” or “some” consideration to leaving the state because of the high cost of housing, heavy taxation or its political culture. …Business is booming for Scott Fuller, who runs a real estate relocation business. Called Leaving the Bay Area and Leaving SoCal, the company helps people ready to move away from the state’s two largest metro areas sell their homes and find others.

Niall Ferguson opines for Bloomberg about the Golden State’s outlook.

As my Hoover Institution colleague Victor Davis Hanson put it last month, California is “the progressive model of the future: a once-innovative, rich state that is now a civilization in near ruins.”… It’s not that California politicians don’t know how to spend money. Back in 2007, total state spending was $146 billion. Last year it was $215 billion. …the tax system is one of the most progressive, with a 13.3% top tax rate on incomes above $1 million — and that’s no longer deductible from the federal tax bill as it used to be. …And there’s worse to come. The latest brilliant ideas in Sacramento are to raise the top income rate up to 16.8% and to levy a wealth tax (0.4% on personal fortunes over $30 million) that you couldn’t even avoid paying if you left the state. (The proposal envisages payment for up to 10 years after departure to a lower-tax state.) It is a strange place that seeks to repel the rich while making itself a magnet for illegal immigrants… And the results of all this progressive policy? A poverty boom. California now has 12% of the nation’s population, but over 30% of its welfare recipients. …according to a new Census Bureau report, which takes housing and other costs into account, the real poverty rate in California is 17.2%, the highest of any state. …But that’s not all. The state’s public schools rank 37th in the country… Health care and pension costs are unsustainable. …people eventually vote with their feet. From 2007 until 2016, about five million people moved to California but six million moved out to other states. For years before that, the newcomers were poorer than the leavers. This net exodus is surging in 2020. …Now we know the true meaning of Calexit. It’s not secession. It’s exodus.

It’s not just high taxes and poor services.

George Will indicts California’s politicians for fomenting racial discord in his Washington Post column.

California…progressives…have placed on November ballots Proposition 16 to repeal the state constitution’s provision…forbidding racial preferences in public education, employment and contracting. Repeal, which would repudiate individual rights in favor of group entitlements, is part of a comprehensive California agenda to make everything about race, ethnicity and gender. …Proposition 16 should be seen primarily as an act of ideological aggression, a bold assertion that racial and gender quotas — identity politics translated into a spoils system — should be forthrightly proclaimed and permanently practiced… California already requires that by the end of 2021 some publicly traded companies based in the state must have at least three women on their boards of directors… And by 2022, boards with nine or more directors must include at least three government-favored minorities. …Gov. Gavin Newsom (D) signed legislation requiring all 430,000 undergraduates in the California State University system to take an “ethnic studies” course, and there may soon be a similar mandate for all high school students. “Ethnic studies” is an anodyne description for what surely will be, in the hands of woke “educators,” grievance studies.

Several years ago, I crunched some numbers to show California’s gradual decline.

But there was probably no need for those calculations. All we really need to understand is that people are “voting with their feet” against the Golden State.

Simply stated, productive people are paying too much of a burden thanks to excessive spending, excessive taxes, and excessive regulation.

So they’re leaving.

P.S. Many Californians are moving to the Lone Star State, and if you want data comparing Texas and California, click here, here, herehere, and here.

P.P.S. Some folks in California started talking about secession after Trump’s election. Now that the state’s politicians are seeking a bailout, I expect that talk has disappeared.

P.P.S. My favorite California-themed jokes can be found here, here, and here.

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New York is ranked dead last for fiscal policy according to Freedom in the 50 States.

But it’s not the worst state, at least according to the Tax Foundation, which calculates that the Empire State is ranked #49 in the latest edition of the State Business Tax Climate Index.

Some politicians from New York must be upset that New Jersey edged them out for last place (and the Garden State does have some wretched tax laws).

So in a perverse form of competition, New York lawmakers are pushing a plan to tax unrealized capital gains, which would be a form of economic suicide for the Empire State and definitely cement its status as the place with the worst tax policy.

Here are some excerpts from a CNBC report.

The tax, part of a new “Make Billionaires Pay” campaign by progressive lawmakers and activists, would impose a new form of capital gains tax on New Yorkers with $1 billion or more in assets. …“It’s time to stop protecting billionaires, and it’s time to start working for working families,” Rep. Alexandria Ocasio-Cortez, D-N.Y., said… Currently, taxpayers pay capital gains tax on assets only when they sell. The new policy would tax any gain in value for an asset during the calendar year, regardless of whether it’s sold. Capital gains are taxed in New York at the same rate as ordinary income, so the rate would be 8.8%.

Given her track record, I’m not surprised that Ocasio-Cortez has embraced this punitive idea.

That being said, the proposal is so radical that even New York’s governor understands that it would be suicidal.

Gov. Andrew Cuomo said raising taxes on billionaires and other rich New Yorkers will only cause them to move to lower-tax states. …“If they want a tax increase, don’t make New York alone do a tax increase — then they just have the people move… Because if you take people who are highly mobile, and you tax them, well then they’ll just move next door where the tax treatment is simpler.”

Actually, they won’t move next door. After all, politicians from New Jersey and Connecticut also abuse and mistreat taxpayers.

Instead, they’ll be more likely to escape to Florida and other states with no income taxes.

In a column for the New York Post, E.J. McMahon points out that residents already have been fleeing.

…there were clear signs of erosion at the high end of New York’s state tax base even before the pandemic. Between 2010 and 2017, according to the Internal Revenue Service, the number of tax filers with incomes above $1 million rose 75 percent ­nationwide, but just 49 percent in New York. …Migration data from the IRS point to a broader leakage. From 2011-12 through 2017-18, roughly 205,220 New Yorkers moved to Florida. …their average incomes nearly doubled to $120,023 in 2017-18, from $63,951 at the start of the period. Focusing on wealthy Manhattan, the incomes of Florida-bound New Yorkers rose at the same rate from a higher starting point— to $244,936 for 3,144 out-migrants in 2017-18, from $124,113 for 3,712 out-migrants in 2011-12.

What should worry New York politicians is that higher-income residents are disproportionately represented among the escapees.

And the author also makes the all-important observation that these numbers doubtlessly will grow, not only because of additional bad policies from state lawmakers, but also because the federal tax code no longer includes a big preference for people living in high-tax states.

These figures are from the ­period ending just before the new federal tax law temporarily virtually eliminated state and local tax deductions for high earners, raising New York’s effective tax rates higher than ever. …soak-the-rich tax sloganeering is hardly a welcome-home signal for high earners now on the fence about their futures in New York.

The bottom line is that it’s a very bad idea for a country to tax unrealized capital gains.

And it’s a downright suicidal idea for a state to choose that perverse form of double taxation. After all, it’s very easy for rich people to move to Florida and other states with better tax laws.

And since the richest residents of New York pay such a large share of the tax burden (Investor’s Business Daily points out that the top 1 percent pay 46 percent of state income taxes), even a small increase in out-migration because of the new tax could result in receipts falling rather than rising.

Another example of “Revenge of the Laffer Curve.”

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Two days ago, I looked at top income tax rates for the various states.

Yesterday, I shared the data for the states on sales tax rates.

The big takeaway from those two sources of data is that California politicians are very greedy.

But are they the greediest politicians in the country? What if we also measure other sources of tax revenue (property taxes, excise taxes, severance taxes, etc)?

And what about the various fees and charges that also are imposed by state and local governments?

To account for all these factors, we obviously need a comprehensive measure. And since the real cost of government is how much it is spending (regardless of whether the outlays are financed by taxes or borrowing), the most accurate approach is to calculate the relative spending burdens imposed by state and local governments.

The Census Bureau actually collects that data (albeit with a lag, so the most-recent data is for 2017).

But you don’t simply want to look at total spending by state and local governments. You also want to adjust for population (specifically, the population data for 2017) so we can calculate the per-capita burden of state spending.

Moreover, it’s also important to understand that some states have varying levels of income (for historic reasons, policy reasons, and difference in the cost of living). So if you want to calculate the economic burden of state and local spending, you also need data on state personal income for 2017.

So I put all these numbers into an excel file and crunched the numbers to see how the 50 states (plus Washington, DC) compare based on these two ways of showing fiscal burdens.

The following table shows the good states, at least relatively speaking. I’m amazed to see Connecticut and New Jersey in the top 10 for spending as a share of personal income. This merits further investigation, but one obvious takeaway is that it’s good to be a high-income state.

The goal, of course, should be to appear on both lists. On that basis, Idaho, Florida, and Nevada deserve praise.

But this three-part series isn’t designed to highlight the good states.

We want to know which states have the greediest politicians. And greed is being measured by their propensity to buy votes by spending other people’s money.

Once again, we’ll show the spending data both as a share of personal income and as a per-capita calculation. On this basis, Alaska is terrible (the politicians spend oil money with reckless abandon), as is the District of Columbia.

Wyoming also is a state with profligate politicians. It has no income tax and a modest sales tax, but lawmakers (just like in Alaska) can’t resist buying votes with all the money generated by energy taxes (which is why I penalized the state when writing about good state tax systems back in 2015).

This explains why North Dakota is on both lists as well.

If we focus on states that don’t get lots of money from energy taxes, than New York and Oregon deserve special scorn for appearing in both columns.

P.S. One area that requires further exploration (partially explained by the Third Theorem of Government) is the impact of 1,386 federal transfer programs that subsidize/encourage more spending by state and local governments.

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Yesterday, in Part I of our series about greedy state politicians, we looked at top income tax rates.

The worst state, not surprisingly, was California with a top tax rate of 13.3 percent.

This onerous tax rate, combined with low-quality government and absurd levels of red tape, helps to explain why so many people have fled the Golden State.

(And because California’s problems are self-inflicted, that’s the biggest reason why the state should not get a bailout from Uncle Sam.)

Today, we’re going to look at another major source of tax revenue for state politicians.

Here are some excerpts from the Tax Foundation’s report on sales tax rates.

While graduated income tax rates and brackets are complex and confusing to many taxpayers, sales taxes are easier to understand; consumers can see their tax burden printed directly on their receipts. In addition to state-level sales taxes, consumers also face local sales taxes in 38 states. These rates can be substantial, so a state with a moderate statewide sales tax rate could actually have a very high combined state and local rate compared to other states. This report provides a population-weighted average of local sales taxes… Five states do not have statewide sales taxes: Alaska, Delaware, Montana, New Hampshire, and Oregon. Of these, Alaska allows localities to charge local sales taxes. The five states with the highest average combined state and local sales tax rates are Tennessee (9.55 percent), Arkansas (9.53 percent), Louisiana (9.52 percent), Washington (9.23 percent), and Alabama (9.22 percent). The five states with the lowest average combined rates are Alaska (1.76 percent), Hawaii (4.44 percent), Wyoming (5.34 percent), Wisconsin (5.43 percent), and Maine (5.50 percent). California has the highest state-level sales tax rate, at 7.25 percent.

Here’s the map that accompanied the report.

It’s good to be gray. By contrast the states with the darkest colors have the most onerous rates.

As noted in the excerpt above, Tennessee, Arkansas, Louisiana, and Washington have the greediest politicians, at least measured by sales tax rates.

But this is the point where it makes sense to merge today’s map with yesterday’s map. Because Tennessee and Washington don’t impose income taxes, while Louisiana and Arkansas both make that mistake.

And if you combine the tax rates from both maps, you’ll find that Tennessee and Washington are relatively low-tax states while Louisiana and Arkansas are relatively high-tax states.

So one of the lessons to be learned is that it’s never a good idea to give politicians multiple sources of revenue (something to remember every time greedy officials in D.C. broach the idea of a value-added tax).

But let’s keep our focus on the main topic, which is identifying the state with the greediest politicians?

If we continue with the methodology of combining the numbers from both maps, California easily ranks as the worst state, with a combined rate of 21.98 percent.

Indeed, it has a huge lead compared to the next-worst states (New York, New Jersey, and Minnesota), all of which have combined rates of between 17-18 percent.

What’s the best state?

Depends on the approach. If you count only wages and salaries, then New Hampshire wins with a combined rate of 0.0 percent. But if you include New Hampshire’s unfortunate policy of imposing income tax on interest and dividends, then Alaska wins with a combined rate of 1.76 percent.

Wyoming, South Dakota, and Florida also deserve applause. Those states are ranked #3, #4, and #5 because they have no income taxes and also manage to keep sales taxes at semi-reasonable levels.

P.S. Alaska and Wyoming both collect large amounts of energy taxes, so their good scores don’t necessarily reflect a commitment to low overall tax burdens.

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When considering which state has the greediest politicians, the flippant (but understandable) answer is to say “all of them.”

A more serious way of dealing with that question, though, is to look at overall rankings of economic policy.

According to the Fraser Institute, we can assume that Delaware apparently has the worst politicians and New Hampshire has the best ones.

According to comprehensive calculations in Freedom in the 50 States, New York’s politicians seem to be the worst and Florida’s are the best.

But what if we just want to know the state where politicians squeeze the most money from taxpayers? In other words, which state has the worst tax system?

The Tax Foundation gives us part of the answer in their review of state income tax burdens.

Individual income taxes are a major source of state government revenue, accounting for 37 percent of state tax collections. …Forty-one tax wage and salary income… Of those states taxing wages, nine have single-rate tax structures… Conversely, 32 states levy graduated-rate income taxes… Top marginal rates range from North Dakota’s 2.9 percent to California’s 13.3 percent.

Here’s the accompanying map.

It’s very good to live in a gray state (no income tax!) and you definitely don’t want to live in a red or maroon state.

Unsurprisingly, California is the worst of the worst, with a top tax rate of 13.3 percent. No wonder productive people have been escaping the not-so-Golden State.

Hawaii and New Jersey are the next worst states, followed by Oregon and Minnesota. Though it’s definitely worth noting that there’s a local income tax in New York City, which would put the residents of that unfortunate community (if NYC was a state) in second place after California.

P.S. The disadvantage of living in a high-tax jurisdiction is especially significant now that there’s no longer a loophole in the federal tax code that subsidizes state profligacy.

P.P.S. The maroon and red states are obviously among the worst places to be an entrepreneur, investor, or business owner, though people with lots of unrealized capital gains fortunately don’t have to worry (yet!) about punitive tax laws.

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As indicated by one of my columns last week, I’m a big believer in federalism.

Indeed, I’ve even proposed that Washington shouldn’t operate any social programs. No food stamps. No Medicaid. No redistribution programs of any kind.

Such programs, to the extent they should exist, should be handled by state and local governments.

The welfare reform legislation under Bill Clinton is an example of how to move in the right direction. A top-down program from Washington was turned into a block grant, and then state and local governments got the freedom to choose policies that might actually help the poor become self-sufficient instead of being trapped in dependency.

Not pure libertarianism, of course, but still an example of progress. And we got good results.

Given this track record, I was very interested to see a column in today’s New York Times by Ezekial Emanuel and Rahm Emanuel on the topic of federal-state fiscal relations.

Medicaid and unemployment insurance…need permanent institutional reform and modernization. …the next stimulus package…should then be…a…federal-state Grand Bargain would solve festering problems in health care and unemployment assistance Years of political experience show that no matter how imperative and sensible, a policy’s chances of success are diminished unless it delivers political benefits. This bargain would create a victory for both parties.

This sounds intriguing. And potentially even desirable.

There’s no question, after all, that the current Medicaid system desperately needs reform. And the unemployment program also is a mess, luring people into joblessness.

So what exactly are the Emanuel brothers proposing? What is the “Grand Bargain” that offers benefits for both sides?

Sadly, it turns out that their bipartisan rhetoric is just an excuse for bigger government.

The bargain, which we call American Modernization Initiative…the federal government to assume the costs and administration of Medicaid and unemployment insurance, the states would have to agree to use freed up resources — a quarter of a trillion dollars per year — to invest in education and infrastructure. …The Grand Bargain is not only good policy, but good politics. …Governors would no longer be responsible for large programs… With the American Modernization Initiative, the constant, bitter battles over cutting state programs to fund growing Medicaid costs will disappear.

Yes, you read correctly. Their idea of a “bargain” is that the federal government agrees to spend more money so that that state governments will then have the ability to spend more money.

Even Republicans aren’t stupid enough to go along with that kind of deal.

So I’ll propose an alternative.

According to Chris Edwards, there are now nearly 1,400 programs involving some sort of link or overlap between the federal government and state governments.

The biggest of these programs is Medicaid, accounting for 56 percent of the overall spending.

So why not give the states a choice: They either take full responsibility for Medicaid – including the financing after some transition period. Or they take responsibility for the other 1,385 programs (probably more by now) programs – assuming, again, they are responsible for the financing after a transition period.

Regardless of their choice, the end result would be a system where there’s a reasonably significant shift toward federalism. And perhaps we would add a bit of clarity to the blurry line that currently sets the boundary between what’s Washington’s job and what’s the role of state governments.

And maybe, just maybe, there wouldn’t be as much wasteful leakage as we have now.

P.S. For what it’s worth, there’s strong academic evidence that decentralized governments produce better outcomes.

P.P.S. Federalism doesn’t only apply to income-redistribution programs. We also should eliminate any role for Washington in areas like education and transportation.

P.P.P.S. Here’s the data on the history of redistribution spending in developed nations.

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Should high-tax states such as California and New York get a bailout?

I explained last month why that would be a mistake, in large part because bailouts would reward states for irresponsible fiscal policy (similar to my argument that countries like Austria and the Netherlands shouldn’t be bullied into providing bailouts for Italy and Spain).

And I’ve shared two videos (here and here) for those who want more information about how bailouts encourage “moral hazard.” And this is true for banks (think TARP) as well as governments.

Today, though, I want to focus on some numbers that show what’s really causing fiscal problems in some states.

Adam Michel and David Ditch of the Heritage Foundation have generated some startling data on state government finances.

Instead of waiting on a handout from Washington, states should clear the way for a more robust economic recovery by addressing their unsustainable finances. States and local government spending has increased over the recent past… After adjusting for inflation and increases in population, state and local spending (in constant 2019 dollars) has grown from $5,596 per person in 2000 to $7,268 per person in 2019. That amounts to a 30% increase in the real cost of state and local government over just two decades, even without the thousands of dollars per person the federal government sends to states and localities through a wide variety of programs. …not all states spend equally. As of 2017, Florida, Georgia, and Arizona spent about $5,800 per person on state and local governments, but New York spent more than $11,700 per person.

The most important number is the above excerpt is that there’s been a 30 percent increase in per-capita state spending after adjusting for inflation.

That’s a very worrisome trend.

But not all states are created equal. Or, to be more precise, they’re not all equally profligate. Here’s the chart that starkly illustrates why some states are in trouble.

At the risk of understatement, California and New York have not complied with the Golden Rule for fiscal policy.

Needless to say, there’s no justification for the notion that taxpayers in well-run states such as Texas and Florida should be coerced into providing bailouts for politicians in poorly run states.

And now we have a compelling visual that settles the argument.

P.S. Over the past several years, I’ve done multiple columns comparing Texas and California and also several columns comparing New York and Florida, all of which underscore that blue states have created their own problems by taxing too much and spending too much.

P.P.S. Thankfully, people can vote with their feet by moving from high-tax states to low-tax states. Let’s hope that Congress doesn’t enact a bailout so they’re forced to subsidize the states that drove them away.

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Politicians from New York want states to get a big bailout from Uncle Sam. I explained earlier this month that this would be a bad idea.

Simply stated, the Empire State is in big trouble because it has a bloated government, not because of the coronavirus.

Probably the strongest piece of evidence is that New York is ranked #50 for fiscal policy according to Freedom in the 50 States.

If you want to understand how New York’s politicians have created a fiscal disaster, let’s compare the Empire State to Florida, which is ranked #1.

I’ve already done that three times (Round #1, Round #2, and Round #3), so this will be Round #4.

The Wall Street Journal compared the two states in an editorial two days ago.

…let’s do the math to consider which state has managed its economy and finances better over the last decade. …Democrats in Albany are claiming to be victims of events that are out of their control. But they have increased spending by $43 billion since 2010—about $570,000 for each additional person. Florida’s budget has increased by $28 billion while its population has grown 2.7 million—a $10,400 increase per new resident. New York has a top state-and-local tax rate of 12.7%, while Florida has no income tax. Yet New York has a growing budget deficit, while Mr. Scott inherited a large deficit but built a surplus and paid down state debt. The difference is spending. …Blame New York’s cocktail of generous benefits, loose eligibility standards and waste. New York spends about twice as much per Medicaid beneficiary and six times more on nursing homes as Florida though its elderly population is 20% smaller. …The rate of private job growth in Florida has been about 60% higher than in New York from January 2010 to January 2020. Finance jobs expanded by 25% in Florida compared to 9.7% in New York. …The policy question is why taxpayers in Florida and other well-managed states should pay higher taxes to rescue an Albany political class that refuses to restrain its tax-and-spend governance. Public unions soak up an ever-larger share of tax dollars, but Albany refuses to change.

If you want further details on the difference between the two states, Chris Edwards takes a close look at the burden of government spending.

New York and Florida have similar populations of 20 million and 21 million, respectively. But governments in New York spent twice as much as governments in Florida, $348 billion compared to $177 billion. On some activities, spending in the two states is broadly similar… But in other budget areas, New York’s excess spending is striking. New York spent $69 billion on K-12 schools in 2017 compared to Florida’s $28 billion. Yet the states have about the same number of kids enrolled—2.7 million in New York and 2.8 million in Florida. New York spent $71 billion on public welfare compared to Florida’s $28 billion. Liberals say that governments provide needed resources to people truly in need. Conservatives say that generous handouts induce high demand whether people need it or not. Given that New York’s welfare costs are 2.5 times higher than Florida’s, the latter effect probably dominates. …New York governments employed 1,196,632 workers in 2017 compared to Florida’s 889,950 (measured in FTEs). …Most New York residents do not benefit from bloat in government payrolls, inefficient transit, excessive welfare, and deficit spending. To them, the high taxes are disproportionate to the government services received. That is why they are moving to better‐​managed states with lower taxes.

Here’s the accompanying chart.

And he also compares the level of bureaucracy in both states.

New York’s excess includes spending more on handouts such as welfare. Another cause of New York’s high spending is employment of more government workers and paying them more than in Florida. …New York governments employ 34 percent more workers than Florida governments. …The two states have similar K-12 school enrollments of 2.7 million in New York and 2.8 million in Florida. But New York employs 31 percent more teachers and administrators than Florida. Do the 111,000 extra staff in New York generate better school outcomes? Apparently not…study puts Florida near the top and New York in the middle on school quality. Does New York really need two times more highway workers than Florida and three times more welfare workers? …Government workers in New York make 42 percent more in wages than government workers in Florida, on average.

Here’s the accompanying chart.

The bottom line is that New York is a great place to be an over-paid bureaucrat in an over-staffed bureaucracy.

But if you’re a taxpayer, Florida is the easy winner – which may explain why so many productive people are leaving the Empire State and permanently migrating to the Sunshine State.

P.S. The same pattern exists all across the United States. Taxpayers are escaping the poorly managed states and fleeing to low-tax states. Especially ones with no income taxes.

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A Supreme Court Justice pointed out in 1932 that “a state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”

Well, we’ve had several experiments in higher taxes and higher spending, and they don’t work.

States with heavier fiscal burdens are accumulating ever-higher levels of debt (especially unfunded liabilities) while also causing an ever-greater exodus of taxpayers to other states.

In the long run, this is a recipe for fiscal crisis since it’s hard to give away lots of money if there aren’t enough taxpayers to finance that profligacy (as illustrated by this set of cartoons).

Well, with the help of the coronavirus, the long run may have arrived.

But the pandemic only exposed a problem that already existed.

Mitch Daniels, the former governor of Indiana, wrote two years ago in the Washington Post that poorly manged states like Connecticut shouldn’t be bailed out by taxpayers in better-run states.

…several of today’s 50 states have descended into unmanageable public indebtedness. …in terms of per capita state debt, Connecticut ranks among the worst in the nation, with unfunded liabilities amounting to $22,700 per citizen. Each profligate state is facing its own budgetary perdition for different reasons, but most share common factors. The explosion of Medicaid spending, even before Obamacare, has devoured state funds… In parallel, public pensions of sometimes grotesque levels guarantee that the fiscal strangulation will soon get much worse. In California, some retired lifeguards are receiving more than $90,000 per year. A retired university president in Oregon received $76,000 per month — and no, that’s not a typo. These are the modern-day welfare queens… More and more desperate tax increases haven’t cured the problem; it’s possible that they are making it worse. When a state pursues boneheaded policies long enough, people and businesses get up and leave, taking tax dollars with them.

In a remarkably prescient passage, Daniels speculates about a future emergency that will lead to pressure for a federal bailout.

Sometime in the next few years, we are likely to go through our own version of the recent euro-zone drama with, let’s say, Connecticut in the role of Greece and maybe a larger, “too big to fail” partner such as Illinois as Italy. Adding up the number of federal legislators from the 15 or 20 fiscally weakest states, one can count something close to half the votes in the House.

Which brings us to the current situation.

The crowd in Washington has already funneled several hundred billion dollars to state and local governments.

But politicians like Governor Cuomo in New York and Governor Pritzker in Illinois view all that money as an appetizer and now they want the fiscal equivalent of an all-you-can-eat buffet.

The editors of the Wall Street Journal are not sympathetic to these fiscal pyromaniacs.

The question to ask is why taxpayers in Appleton and Sarasota should rescue politicians and unions in Albany and Springfield? …states like New York were already in trouble from their own mismanagement. …take Illinois, where Gov. J.B. Pritzker…raised taxes in 2019 and wants to make the state’s current flat tax progressive… Yet he and the unions who own the state house have blocked pension or spending reforms. They’ve long bet on a federal bailout, and they see Covid-19 as their main chance. …President Trump has signaled he’s open to a state bailout because, well, he’s open to anything these days. But Senate Majority Leader Mitch McConnell caused a stir…when he said states should consider bankruptcy rather than get a bailout. …Mr. McConnell’s larger point is that states shouldn’t get more no-strings cash. Private companies that borrow from the Fed and Treasury have to meet stiff conditions, including limits on compensation, and the same should apply to state governments. Bailout conditions should include cuts in nonessential spending, immediate and permanent reductions in public pension benefits.

Kevin Williamson explains in National Review that the problem is a pre-existing penchant for over-spending and vote-buying.

Bailing out the Illinois state pension system is the worst idea from a week in which we were discussing the health benefits of mainlining Lysol. Irresponsible state and local governments are attempting to exploit the fear and disruption of the coronavirus epidemic to push off the consequences of their decades of reckless and culpably dishonest policies onto the federal government. … One of the largest problems facing state and local governments, from Illinois to Oklahoma and from Los Angeles to Dallas, is “unfunded liabilities,” meaning the differences between the promises governments have made to their employees and the money they have set aside to pay for those things. …Government workers are a powerful political constituency — they run California — and they want the same thing everybody else does: more. …If Washington were to dump a few billion dollars into the lap of the feckless cartwheeling goobers who run Illinois, the underlying problem of chronic underfunding of future pension liabilities would remain, and Illinois would be right back where it is today in a year or two. A bailout would not solve the problem — it would keep the problem from being solved.

Adam Michel of the Heritage Foundation explains how bailouts create the wrong incentives.

The prospect of federal tax dollars creates an incentive for state legislatures to both expand existing programs beyond sustainable levels, and to simultaneously underfund those programs in hopes of further federal support. …One example is how states often delay needed infrastructure projects (for which funds are locally available) in hopes of one day receiving federal funds to cover the project costs. …An unrestricted bailout of the states could be highly unequal, forcing taxpayers in well-run states to subsidize those who have systematically underfunded their pensions and rainy day funds, or those states who have particularly volatile revenue systems. …Federal aid tends to expand state budgets and make them less resilient during future crises. Simply moving state funding to the federal government does little more than redistribute local costs to federal taxpayers across all 50 states.

Senator Rick Scott of Florida opines for the Wall Street Journal that taxpayers in his state shouldn’t pick up the tab for New York’s profligate politicians.

…one thing we absolutely shouldn’t do is shield states from the consequences of their own bad budgetary decisions over the past few decades. …Democrats’ true aim: using federal taxpayer dollars to bail out poorly run states—typically, states controlled by Democrats. …Florida is well-positioned to address the coming shortfall in revenue without a bailout. The state may need to make some choices, which is what grown-ups do in tough economic times. And if we need to borrow a small amount in the short term to get us through this economic crisis, that borrowing will be cheaper thanks to our AAA bond rating and the reduction in state debt. New York Gov. Andrew Cuomo said it was “irresponsible” and “reckless” not to bail out states like his, a state with two million fewer people than Florida and a budget almost double the size of ours.

Well stated. Any comparison of Florida and New York shows the benefit of limited government.

Jonathan Williams and Lee Schalk of the American Legislative Exchange Council, opining for the Hill, argue against a bailout.

A growing chorus of governors is calling on Congress to “bail out” state governments. …Their plea comes on the heels of the $2 trillion CARES Act, which included a general $150 billion COVID-19 relief fund, a $30 billion education costs fund, a $45 billion disaster relief fund and more for state and local governments. …History suggests that federal bailouts…incentivize future fiscal irresponsibility and create a moral hazard problem. Bailouts reward fiscally reckless states at the expense of fiscally responsible ones. Academic research from the Mercatus Center at George Mason University shows that federal bailouts could even lead to higher state level taxes. According to their research, every dollar of federal aid to states drives state taxes higher by 33 to 42 cents. …State and local governments do not lack revenue. They lack spending restraint. Over the past 40 years, after fully accounting for increases in population and inflation, state and local direct general spending has grown by 88 percent.

The last sentence in the excerpt is key. State politicians have been violating fiscal policy’s Golden Rule by letting spending grow too fast.

What’s needed is TABOR-style spending restraint, as Williams pointed out in a 2015 speech.

So if a bailout is the wrong solution, what’s the right solution? There are three potential options.

Ramesh Ponnuru writes that states should have a process for declaring bankruptcy.

Some states have made exorbitant promises to their employees over the years without providing adequate funding. They made up the difference, on paper, by projecting unrealistically high returns on pension investments. The Federal Reserve, applying a better projection of returns, estimates that pensions are underfunded by $4 trillion. McConnell is right to think that it would be unfair to make Florida’s teachers and firefighters pay for benefits for their counterparts in Illinois, and unwise to create an incentive for further irresponsibility by state officials. …Federal law currently makes no provision for states to re-organize their commitments through bankruptcy proceedings. Creating one would not keep the coronavirus from crushing state budgets. It could, however, prevent, or at least limit, future federal bailouts for state mismanagement of pensions.

His colleague at National Review, Kevin Williamson, has a different perspective. His article argues that default is better than a Washington-dictated process for bankruptcy.

The several states are not administrative subdivisions of the federal government. They are powers in their own right, superseded by the U.S. government only in certain matters that involve more than one state: Washington can declare war or write immigration law, but it cannot tell Austin how to run the Texas Rangers or Sacramento how to prioritize its finances. Because bankruptcy law is federal law, putting states into bankruptcy reorganization would upend our basic constitutional arrangement, making state governments answerable to federal bankruptcy judges and, behind them, to Congress. …Sovereigns don’t go bankrupt. Sovereigns default. And that is what is likely to happen with the pension crisis, at least as far as states’ creditors are concerned. It is what should happen. …we should not use the coronavirus as an excuse to federalize the consequences of culpably irresponsible and fundamentally dishonest governance at the state and local level. …If we want debt markets to work, then investors have to pay the price for bad investments. (Lending money to an organization run by Bill de Blasio is a bad decision.) Making creditors take a painful haircut creates incentives to discourage such willy-nilly lending and profligate spending in the future. …Government debt should in this respect be treated like any other debt — and we should change the law to strip municipal bonds of their tax-free status, which creates a subsidy for debt.

And Andrew Biggs of the American Enterprise Institute argues in the Wall Street Journal that – if a bailout is offered – it should be accompanied by strict conditions.

Congress may want to offer assistance, but it should come with strict conditions: Any state looking for a pension handout must either live by the stricter accounting rules federal law imposes on private pension plans or freeze its pension and shift all employees to defined-contribution retirement plans. Private-sector plans must assume more-conservative investment returns than public-sector plans and address unfunded liabilities more rapidly. As a result, private pensions today have set aside more than twice as much funding per dollar of promised future benefits than have state and local pensions. …Freezing a pension doesn’t make its unfunded liabilities go away. But it caps existing liabilities while shifting employees to plans in which the government’s funding obligation is clearly defined and can’t be evaded using actuarial or accounting tricks.

Of these options, a conditional bailout is not a good idea, even though it is the best way of doing the wrong thing.

Either bankruptcy or default would be a much better choice, and I lean in the direction of default (the same view I have when contemplating Europe’s failing welfare states).

But the right option is to avoid getting in trouble in the first place.

And that means low taxes, spending restraint, and other market-friendly policies.

I’ll simply note that the states most anxious for bailouts are near the bottom in rankings of small government and economic liberty.

If Washington provides a bailout, that’s a reward for statism and irresponsibility (sort of like foreign aid subsidizing bad policy overseas).

P.S. One month ago, I wrote that the worst coronavirus-related proposal would be restoring the federal tax deduction for state and local tax payments.

I still think that is a terrible idea, of course, but a big bailout from Washington would be even worse.

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I’ve written that policy makers need to consider both the human toll of the coronavirus and the human toll of a depressed economy.

I also discussed this tradeoff with Brian Nichols, beginning about seven minutes into this podcast.

And, as you can see from this tweet, even the United Nations has acknowledged that a weak economy leads to needless death.

Since I don’t have any expertise on epidemiology, I’m not arguing that the economy should be opened immediately. I’m simply stating that the people who do make such decisions should be guided by the unavoidable tradeoff that exists between lives lost from disease and lives lost from foregone prosperity.

Which then raises the question of who should make such decisions.

As reported by the New York Post, President Trump claims he has all the authority.

President Trump on Monday said the decision to reopen the country’s ailing economy ultimately rests with him, not state leaders, as he feuds with governors over when to allow Americans to return to work. …Trump is now looking at reopening the economy by May 1, putting him on a collision course with state leaders who are pushing back, saying it would be dangerous to “take our foot off of the accelerator” in the war against the virus. …Rebuffing the president’s claims Monday, constitutional experts say it is state leaders who have the power to police their citizens under the 10th Amendment.

Trump is wrong.

He’s wrong in part because the Constitution limits the powers of the central government.

But he’s also wrong because – as explained by scholars from the Austrian School of Economics – we’re far more likely to get better choices when they’re decentralized.

In some cases, that means allowing individuals to make informed choices about how much risk to take.

But, to the extent government must be involved, it makes more sense to have state and local officials make choices rather than the crowd in Washington.

Opining for the Wall Street Journal, Walter Olson explains why federalism is the right approach.

Public-health merits aside, the president can’t legally order the nation back to work. The lockdown and closure orders were issued by state governments, and the president doesn’t have the power to order them to reverse their policies. In America’s constitutional design, …the national government is confined to enumerated powers. It has no general authority to dictate to state governments. Many of the powers government holds, in particular the “police power” invoked to counter epidemics, are exercised by state governments and the cities to which states delegate power. …Modernizers have long scoffed at America’s federalist structure as inefficient and outdated, especially in handling emergencies. …Today you won’t find these critics scoffing at the states or overglamorizing Washington. One federal institution after another, including the Food and Drug Administration and Centers for Disease Control and Prevention, has been caught flat-footed by Covid-19. …State governments, by contrast, with some exceptions here and there, have responded to the emergency more skillfully and in a way that has won more public confidence. …The record of federal systems—some of the best known are in Canada, Germany and Switzerland—suggests there’s a lot of resilience packed into the model.

Michael Brendan Dougherty elaborates in an article for National Review.

Writer Molly Jong-Fast complains, “So the states are basically governing themselves because our president doesn’t know how to president at all?” Well, no. It’s simple: Our president doesn’t have dictatorial powers, even in a national emergency. The president doesn’t have authority to shut down your local gin joint. Your state governor does have this power, in extraordinary circumstances. That so many governors have done so, often responding to popular demand for shutdowns, demonstrates America’s genuine practice of federalism — a system that is allowing us to respond to this crisis even faster than the states of Europe… One of the reasons federalism can act faster is that it allows decentralization. It is less politically risky to impose measures in one state than on an entire nation. You can respond where the hotspots are, rather than imposing costs evenly across an undifferentiated mass of the nation where the overall average risk may be low.

Professor Ilya Somin wrote on this same topic for Reason. He noted limitations on federalism in a pandemic, but also pointed out the benefits of decentralization.

The US is a large and diverse nation, and it is unlikely that a single “one-size-fits-all” set of social distancing rules can work equally well everywhere. In addition, state-by-state experimentation with different approaches can increase our still dangerously limited knowledge of which policies are the most effective. Moreover, if one policymaker screws up, his or her errors are less likely to have a catastrophic effect on the whole nation. …There is, in fact, a long history of state and local governments taking the lead in battling the spread of contagious disease. During the 1918-19 flu pandemic, state and local restrictions were the primary means of inhibiting the spread of the virus, while the federal government did very little.

John Daniel Davidson of the Federalist echoes the benefits of having choices made at the state and local level.

The founders wisely chose a federal republic for our form of government, which means sovereignty is divided between states and the federal government. The powers of the federal government are limited and enumerated, while all powers not granted to the feds are reserved for the states, including emergency police powers of the kind we’re seeing states and localities use now. …Much of the media seems wholly unaware of this basic feature of our system of government. …Trump explained that many governors might have a more direct line on this equipment and if so they should go ahead and acquire it themselves, no need to wait on Washington, D.C. This is of course exactly the way federalism is supposed to work. …We should expect the government power that’s closest to affected communities to be the most active, while Washington, D.C., concern itself with larger problems.

And those “larger problems” are the ones enumerated in Article 1, Section 8.

The bottom line is that we should always remember the Third Theorem of Government, which helps to explain one of the reasons why it’s generally a bad idea to give the folks in Washington more power and authority.

Instead, we should try to be more like Switzerland, which is one of the world’s best-governed nations in large part because of a very decentralized approach.

Which may be why economists at the (normally statist) International Monetary Fund found a clear link between federalism and quality governance.

Let’s hope Donald Trump realizes that federalism is the right approach.

P.S. My favorite example of federalism came from Vermont.

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I’m a big fan of federalism. After all, compared to what happens when Washington screws up, there’s a lot less damage if a state or city imposes a bad law.

Moreover, it’s relatively easy to move across a border if a state or city is doing something foolish. Leaving the country, by contrast, is a much bigger step (and a lot harder if you have some money).

That being said, politicians outside of Washington deserve plenty of scorn (to show that Washington has no monopoly on venality and incompetence, I periodically share columns that highlight “Great Moments in State Government” and “Great Moments in Local Government“).

And the coronavirus crisis is giving us plenty of new evidence.

Writing for the Federalist, John Daniel Davidson takes aim at control-freak politicians.

…some mayors and governors…think they have unlimited and arbitrary power over their fellow citizens, that they can order them to do or not do just about anything under the guise of protecting public health. We’ve now witnessed local and state governments issue decrees about what people can and cannot buy in stores, arrest parents playing with their children in public parks, yank people off public buses at random, remove basketball rims along with private property, ticket churchgoers… The most egregious example of this outpouring of authoritarianism was an attempt by Louisville, Kentucky, Mayor Greg Fischer to ban drive-in church services on Easter. …he also threatened arrest and criminal penalties for anyone who dared violate his order, and in an Orwellian twist, invited people to snitch on their fellow citizens. …this didn’t just happen in Louisville. Two churches in Greenville, Mississippi, that were holding drive-in services for Holy Week said police showed up and ordered churchgoers to leave or face a $500 fine. …the targeting of churches, while undoubtedly the most offensive overreach by state and local governments, is hardly the only instance of government gone wild. In Michigan, Gov. Gretchen Whitmer has taken it upon herself to declare what items are and are not “essential,” dictating to grocery stores what they can and cannot sell… Among the nonessential, and therefore banned, items are fruit and vegetable plants and seeds. …(Lottery tickets, on the other hand, are still permitted.)

There’s so much outrageous material in this article that it’s almost impossible to focus on one item.

I’ll simply note that it is entirely predictable – but totally disgusting – that Governor Whitmer in Michigan has exempted sales of lottery tickets from her lockdown order. I guess risk is okay if it’s for the purpose of getting more revenue by screwing poor people.

Since we’re on the topic of Governor Whitmer and Michigan, this tweet indicates that it’s okay to put infants in danger. After all, they don’t line the pockets of government by purchasing lottery tickets.

Let’s look at more examples of nanny-state authoritarianism.

David Harsanyi’s column in National Review is appropriately scathing.

Free people act out of self-preservation, but they shouldn’t be coerced to act through the authoritarian whims of the state. Yet this is exactly what’s happening. …politicians act as if a health crisis gives them license to lord over the most private activities of America people in ways that are wholly inconsistent with the spirit and letter of the Constitution. …What business is it of Vermont or Howard County, Ind., to dictate that Walmart, Costco, or Target stop selling “non-essential” items, such as electronics or clothing? …it is an astonishing abuse of power to issue stay-at-home orders, enforced by criminal law, empowering police to harass and fine individuals for nothing more than taking a walk. …The criminalization of movement ends with…three Massachusetts men being arrested, and facing the possibility of 90 days in jail, for crossing state lines and golfing — a sport built for social distancing — in Rhode Island. …In California, surfers, who stay far away from each other, are banned from going in the water. Elsewhere, hikers are banned from roaming the millions of acres in national parks. …Would-be petty tyrants, such as Dallas judge Clay Jenkins, who implores residences to rat out neighbors who sell cigarettes.

So many awful examples, but I’m especially nauseated by Judge Jenkins and his call for snitching. Makes me wonder if he’s related to Andrew Cuomo, Richard Daley, or David Cameron.

I’ll close with two amusing items.

First, every red-blooded American should cheer for this jogger (and you should cheer for him if you’re a red-blooded person from abroad as well).

Second, here’s some satire that is both seasonal and accurate (though, to be fair, the disciples weren’t practicing social distancing).

P.S. Maybe this is the kind of harassment that led to “Libertarian Jesus“?

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The crowd in Washington has responded to the coronavirus crisis with an orgy of borrowing and spending.

The good news is that the legislation isn’t based on the failed notion of Keynesian economics (i.e., the belief that you get more prosperity when the government borrows money from the economy’s left pocket and then puts it in the economy’s right pocket).

Instead, it is vaguely based on the idea of government acting as an insurer for unforeseen loss of income.

Not ideal from a libertarian perspective, of course, but we can at least hope it might be somewhat successful in easing temporary hardship and averting bankruptcies of otherwise viable businesses.

The bad news is that the legislation is filled with corrupt handouts and favors for the friends and cronies of politicians. Simply stated, they have not “let a crisis go to waste.”

The worst news, however, is that politicians have plenty of additional ideas for how to exploit the crisis.

An especially awful idea for so-called stimulus comes from House Speaker Nancy Pelosi, who wants to restore (retroactively!) the full federal deduction for state and local tax payments.

Pelosi suggested that reversing the tax law’s $10,000 cap on the state and local tax (SALT) deduction… The cap on the SALT deduction has been strongly disliked by politicians in high-tax, Democratic-leaning states such as New York, New Jersey and California… But most Republicans support the SALT deduction cap, arguing that it helps to prevent the tax code from subsidizing higher state taxes.

I’ve written many times on this issue and explained why curtailing that deduction (which basically existed to subsidize the profligacy of high-tax states) was one of the best features of the 2017 tax reform.

Needless to say, it would be a horrible mistake to reverse that much-needed change.

The Wall Street Journal agrees, opining on Pelosi’s proposal to subsidize high tax states.

Democrats are far from finished using the crisis to try to force through partisan priorities they couldn’t pass in normal times. Mrs. Pelosi is now hinting the price for further economic relief may include expanding a regressive tax deduction for high-earners in states run by Democrats. …In the 2017 tax reform, Republicans limited the state and local tax deduction to $10,000. …Democrats have been trying to repeal the SALT cap since tax reform passed. …Blowing up the state and local tax deduction would…also make it easier for poorly governed states to rely on soaking their high earners through capital-gains and income taxes, because the federal deduction would ease the burden. …Mrs. Pelosi’s remarks underscore the potential for further political mischief and long-term damage as the government intervenes… When Democrats next complain that Republicans want to cut taxes “for the rich,” remember that Mrs. Pelosi wants to cut them too—but mainly for the progressive rich in Democratic states.

Maya MacGuineas of the Committee for a Responsible Federal Budget also denounced the idea.

This is not the time to load up emergency packages with giveaways that waste billions of taxpayer dollars… Weakening or eliminating the SALT cap would be regressive, expensive, poorly targeted, and precisely the kind of political giveaway that compromises the credibility of emergency spending. …Retroactively repealing the SALT caps for the last two years would mean sending a check of $100,000 to the household making over $1 million per year, and less than $100 for the average household making less than $100,000 per year. …During this crisis, the Committee implores special interest lobbyists to stand down and lawmakers to put self-serving politics aside.

By the way, I care about whether a change in tax policy will make the country more prosperous in the long run and don’t fixate on whether the change helps or hurts any particular income group. So Maya’s point about the rich getting almost all the benefits is not what motivates me to oppose Pelosi’s proposal.

That being said, it is remarkable that she is pushing a change that overwhelmingly benefits the very richest people in the nation.

The obvious message is that it’s okay to help the rich when a) those rich people live in places such as California, and b) helping the rich also makes it easier for states to impose bad fiscal policy.

Which is why she was pushing her bad idea before the coronavirus ever became an issue. Indeed, House Democrats even passed legislation in 2019 to restore the loophole.

Professor John McGinnis of Northwestern University Law School wrote early last year why the deduction was misguided and why the provision to restrict the deduction was the best provision of the 2017 tax law.

…the best feature of the Trump tax cuts was the $10,000 cap on the deductibility of state and local taxes. It advanced one of the Constitution’s most important structures for good government—competitive federalism. Deductibility of state taxes deadens that competition, because it allows states to slough off some of the costs of taxation to citizens in other states. Moreover, it allows states to avoid accountability for the taxes they impose. Given high federal tax rates in some brackets, high income tax payers end up paying only about sixty percent of the actual tax imposed. The federal government and thereby other tax payers effectively pick up the rest of the tab. …the ceiling makes some taxpayers pay more, but its dynamic effect is to make it less likely that state and local taxes, particularly highly visible state income taxes, will be raised and more likely that they will be cut.

For what it’s worth, I think the lower corporate tax rate was the best provision of the 2017 reform, but McGinnis makes a strong case.

Perhaps the best evidence for this change comes from the behavior of politicians from high-tax states.

Here are some excerpts from a Wall Street Journal editorial from early last year.

New York Gov. Andrew Cuomo…is blaming the state’s $2.3 billion budget shortfall on a political party that doesn’t run the place. He says the state is suffering from declining tax receipts because the GOP Congress as part of tax reform in 2017 limited the state-and-local tax deduction to $10,000. …the once unlimited deduction allowed those in high tax climes to mitigate the pain of state taxes. It amounted to a subsidy for progressive policies. …The real problem is New York’s punitive tax rates, which Mr. Cuomo and his party could fix. “People are mobile,” Mr. Cuomo said this week. “And they will go to a better tax environment. That is not a hypothesis. That is a fact.” Maybe Mr. Cuomo should stay in Albany and do something about that reality.

Amen.

The federal tax code should not subsidize politicians from high-tax states. Nor should it subsidize rich people who live in high-tax states.

If Governor Cuomo is worried about rich people moving to Florida (and he should be), he should lower tax rates and make government more efficient.

I’ll close with the observation that the state and local tax deduction created the fiscal version of a third-party payer problem. It reduced the perceived cost of state and local government, which made it easier for politicians to increase taxes (much as government subsidies for healthcare and higher education have made it easier for hospitals and colleges to increase prices).

P.S. Speaking of fake stimulus, there’s also plenty of discussion on Capitol Hill (especially given Trump’s weakness on the issue) about squandering a couple of trillion dollars on infrastructure, even though such spending a) should not be financed at the federal level, b) would not have any immediate impact on jobs, and c) would be a vehicle for giveaways such as mass transit boondoggles.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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I’ve written dozens of columns explaining why it would be a terrible idea for the United States to enact a value-added tax.

But that’s not because I think consumption taxes are worse than income taxes. Indeed, sales taxes and VATs are less destructive because tax rates tend to be reasonable and there’s no double taxation of saving and investment.

My opposition is solely based on the fact that we shouldn’t give politicians an extra source of revenue to finance bigger government. That would effectively guarantee that the United States would morph into a stagnant European-style welfare state.

In other words, I’d be willing to accept a trade. Politicians get a VAT, but only if they permanently abolish the income tax.

There’s no chance of that happening in Washington, but it may happen in Nebraska, as reported by the North Platte Telegraph.

If Nebraskans can’t agree on reform…, state Sen. Steve Erdman of Bayard has a sweeping answer: …Income and property taxes in Nebraska would be abolished — and the state sales tax replaced by a “consumption tax” to fund state and local governments — if a constitutional amendment spearheaded by Erdman were approved by lawmakers and voters. …It would need “yes” votes from 30 of the 49 senators on final reading to appear on November’s general election ballot. …Nebraska’s state and local governments now collect a combined $9.5 billion annually in taxes, which would require a 10% consumption tax rate to replace, Erdman said. …If income and property taxes go away, Erdman said, all the state and local departments or agencies that enforce, set and collect them wouldn’t be needed, either.

Here’s some additional coverage from KETV.

Imagine not having to pay any property or income taxes in Nebraska, but there’s a catch you’d pay a new consumption tax on just about everything you buy, such as food and medical services, things that are not taxed right now. That is the idea behind a new constitutional resolution introduced by state Sen. Steve Erdman. …He and nine other lawmakers introduced LR300CA on Thursday. The resolution would allow voters to decide whether to replace all those taxes with a consumption tax. It is like a sales tax and would be about 10.6% on everything, including services and food. …He said under this proposal, everyone would get a payment called a prebate of about $1,000, which would offset the cost for low-income families. Erdman said it would also eliminate the need for property tax relief and the state having to offer costly tax incentives to attract businesses. “This is fixing the whole issue, everything. This is eliminating all those taxes and replacing it with a fair tax,” Erdman said. “Nothing is exempt,” Erdman said.

I have no idea if this proposal has any chance of getting approval by the legislature, but Senator Erdman’s proposal for a broad-based neutral tax (i.e., no exemptions) would make Nebraska more competitive.

Which would be a good idea considering that the state is only ranked #28 according to the Tax Foundation and is way down at #44 according to Freedom in the 50 States.

In one fell swoop, Nebraska would join the list of states that have no income tax, which is even better than the states that have flat taxes.

P.S. The switch to a consumption tax would address the revenue side of the fiscal equation. Nebraska should also fix the spending side by copying its neighbors in Colorado and adopting a TABOR-style spending cap.

P.P.S. Unlike advocates of the value-added tax, proponents of a national sales tax support full repeal of the income tax. I don’t think that’s realistic since it’s so difficult to amend the Constitution, but their hearts are in the right place.

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I wrote last week about the ongoing shift of successful people from high-tax states to low-tax states.

And I’ve periodically confirmed this trend by doing comparisons of high-profile states, such as Texas vs. California and Florida vs. New York.

Today, I’m going to focus on Connecticut.

I actually grew up in the Nutmeg State and I wish there was some good news to share. But Connecticut has been drifting in the wrong direction ever since an income tax was imposed about 30 years ago.

And the downward trend may be accelerating.

A former state lawmaker has warned that the golden geese are escaping the state.

A former state representative says wealthy Connecticut residents are leaving the state at “an alarming pace.” Attorney John Shaban says when he returned to private practice in Greenwich in 2016, one of his most popular services became helping some of the state’s top earners relocate to places like Florida… “Connecticut started to thrive 20, 30 years ago because people came here. We were a tax haven, we were a relatively stable regulatory and tax environment, and we were a great place to live,” says Shaban. …Shaban says many small businesses now require little more than a laptop to operate, and that’s making it easier for small business owners to relocate out of state.

The exodus of rich people has even caught the attention of the U.K.-based Economist.

Greenwich, Connecticut, with a population of 60,000, has long been home to titans of finance and industry. …It has one of America’s greatest concentrations of wealth. …You might think a decade in which rich Americans became richer would have been kind to Greenwich. Not so. …the state…raised taxes, triggering an exodus that has lessons for the rest of America…  Connecticut increased income taxes three times. It then discovered the truth of the adage “easy come, easy go”. …Others moved to Florida, which still has no income tax—and no estate tax. …Between 2015 and 2016 Connecticut lost more than 20,000 residents—including 2,050 earning more than $200,000 per year. The state’s taxable-income base shrank by 1.6% as a result… Its higher income taxes have bitten harder since 2018, when President Donald Trump limited state and local tax deductions from income taxable at the federal level to $10,000 a year.

For what it’s worth, the current Democratic governor seems to realize that there are limits to class-warfare policy.

Connecticut Governor Ned Lamont said he opposes higher state income tax rates and he linked anemic growth with high income taxes. …when a caller to WNPR radio on Tuesday, January 7 asked Lamont why he doesn’t support raising the marginal tax rate on the richest 1 percent of Connecticut residents, Lamont responded: “In part because I don’t think it’s gonna raise any more money. Right now, our income tax is 40 percent more than it is in neighboring Massachusetts. Massachusetts is growing, and Connecticut is not growing. We no longer have the same competitive advantage we had compared to even Rhode Island and New York, not to mention, you know, Florida and other places. So I am very conscious of how much you can keep raising that incremental rate. As you know, we’ve raised it four times in the last 15 years.” …Connecticut has seven income tax rate tiers, the highest of which for tax year 2019 is 6.99 percent on individuals earning $500,000 or more and married couples earning $1 million or more. That’s 38.4 percent higher than Massachusetts’s single flat-tax rate for calendar year 2019, which is 5.05 percent.

I suppose it’s progress that Gov. Lamont understands you can’t endlessly pillage a group of people when they can easily leave the state.

In other words, he recognizes that “stationary bandits” should be cognizant of the Laffer Curve (i.e., high tax rates don’t lead to high tax revenues if taxable income falls due to out-migration).

But recognizing a problem and curing a problem are not the same. Lamont opposes additional class-warfare tax hikes, but I see no evidence that he wants to undo any of the economy-sapping tax increases imposed in prior years.

So don’t be surprised if Connecticut stays near the bottom in rankings of state economic policy.

P.S. The last Republican governor contributed to the mess, so I’m not being partisan.

P.P.S. Though even I’m shocked by the campaign tactics of some Connecticut Democrats.

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I looked last year at how Florida was out-competing New York in the battle to attract successful taxpayers, and then followed up with another column analyzing how the Sunshine State’s low-tax policies are attracting jobs, investment, and people from the Empire State.

Time for Round #3.

A new article in the Wall Street Journal explains how successful investors, entrepreneurs, and business owners can save a massive amount of money by escaping states such as New York and moving to zero-income-tax states such as Florida.

This table has the bottom-line numbers.

As explained in the article, taxpayers are discovering that the putative benefits of living in a high-tax state such as New York simply aren’t worth the loss of so much money to state politicians (especially now that the 2017 tax reform sharply reduced the tax code’s implicit subsidy for high-tax states).

There’s a way for rich homeowners to potentially shave tens of thousands of dollars from their tax bills. They can get that same savings the next year and the following years as well. They can cut their taxes even further after they die. What’s the secret? Moving to Florida, a state with no income tax or estate tax. Plenty of millionaires and billionaires have been happy to ditch high-tax states like New York, New Jersey, Connecticut and California. …A New York couple filing jointly with $5 million in taxable income would save $394,931 in state income taxes by moving to Florida… If they had moved from Boston, they’d save $252,500; from Greenwich, Conn., they’d knock $342,700 off their tax bill. …Multimillionaires aren’t just moving their families south, they are taking their businesses with them, says Kelly Smallridge, president and CEO of the Business Development Board of Palm Beach County. “We’ve brought in well over 70 financial-services firms” in the past few years, she says. “The higher the taxes, the more our phone rings.”

An article in the Wall Street Journal late last year explained how states such as Florida are big beneficiaries of tax migration.

David Tepper, Paul Tudor Jones and Barry Sternlicht are among the prominent transplants who have pulled up roots in New York, New Jersey or Connecticut in recent years for Florida. New Yorker Carl Icahn has said he is moving his company to Miami next year. …The loss of the super-wealthy isn’t just a matter of reputation. The exodus of billionaires can crimp state budgets. …The SALT cap has widened the gap between Florida and other states with no income tax, such as Wyoming, and New York City, where residents can owe income taxes at rates that approach 13%.

In a column for National Review, Kevin Williamson analyzes the trade-offs for successful people…and the implications for state budgets.

…one of the aspects of modern political economy least appreciated by the class-war Left: Rich people have options. …living in Manhattan or the nice parts of Brooklyn comes with some financial burdens, but for the cool-rich-guy set, the tradeoff is worth it. …metaphorically less-cool guys are in Florida. They have up and left the expensive, high-tax greater New York City metropolitan coagulation entirely. …Florida has a lot going for it…: Lower taxes, better governance, superior infrastructure… The question is not only the cost, but what you get for your money. Tampa is not as culturally interesting as New York City. …the governments of New York City and New York State both are unusually vulnerable to the private decisions of very wealthy households, because a relatively small number of taxpayers pays an enormous share of New York’s city and state taxes: 1 percent of New Yorkers pay almost half the taxes in the state, and they know where Florida is. New York City has seen some population loss in recent years, and even Andrew Cuomo, one of the least insightful men in American politics, understands that his state cannot afford to lose very many millionaires and billionaires. “God forbid if the rich leave,” he has said. New York lost $8.4 billion in income to other states in 2016 because of relocating residents.

Earlier in 2019, the WSJ opined on the impact of migration on state budgets.

Democrats claim they can fund their profligate spending by taxing the rich, but affluent New Yorkers are now fleeing to other states. The state’s income-tax revenue came in $2.3 billion below forecast for December and January. Mr. Cuomo blamed the shortfall on the 2017 federal tax reform’s $10,000 limit on state-and-local tax deductions. But the rest of the country shouldn’t have to subsidize New York’s spending, and Mr. Cuomo won’t cut taxes.

To conclude, this cartoon cleverly captures the mentality of politicians in high-tax states.

Needless to say, grousing politicians in high-tax states have no legitimate argument. If they don’t provide good value to taxpayers, they should change policies rather than whining about out-migration.

By the way, this analysis also applies to analysis between nations. Why, for instance, should successful people in France pay so much money to their government when they can move to Switzerland and get equivalent services at a much-lower cost.

Heck, why move to Switzerland when you can move to places where government provides similar services at even lower cost (assuming, of course, that anti-tax competition bureaucracies such as the OECD don’t succeed in their odious campaign to thwart the migration of people, jobs, and money between high-tax nations and low-tax nations).

P.S. If you want to see how states rank for tax policy, click here, here, here, and here.

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People underestimate the importance of modest long-run trends.

  • A small boost in economic growth, if sustained, can have a major effect on long-run living standards.
  • A small shift in the growth of government spending, over time, can determine a nation’s fiscal viability.
  • A small change in birthrates, in the long run, has a huge impact on a country’s population and finances.

Another example is state-level migration.

This is occurring for many reasons, including demographics and weather.

But it’s also happening because many people are moving so they can benefit from the better opportunities that exist in lower-tax states.

The Tax Foundation has an article on interstate migration based on data from United van Lines.

States compete with each other in a variety of ways, including attracting (and retaining) residents. Sustained periods of inbound migration lead to greater economic output and growth. Prolonged periods of net outbound migration, however, can strain state coffers… While it is difficult to measure the extent to which tax considerations factor into individuals’ moving decisions, there is no doubt that taxes are important in many individuals’ personal financial deliberations. Our State Business Tax Climate Index uses over 100 variables to evaluate states on the competitiveness of their tax rates and structures. Four of the 10 worst-performing states on this year’s Index are also among the 10 states with the most outbound migration in this year’s National Movers Study (New Jersey,  New York, Connecticut, and California).

Here’s the map showing states ranked my migration status.

Similar data also is collected by U-Haul.

Mark Perry of the American Enterprise Institute put together this visual on the states with the most in-migration and out-migration.

He looked at the data based on voting patterns. I’m more interested in the fact that states without income taxes do very well.

By the way, we don’t have to rely on moving companies.

And here are some excerpts from an editorial by the Wall Street Journal on the topic, based on data from the IRS and Census Bureau.

Slowing population growth will have significant economic and social implications for the country, but especially for high-tax states. The Census Bureau and IRS last week also released state population growth and income migration data for 2018 that show the exodus from high-tax to low-tax states is accelerating. …New York was the biggest loser as a net 180,000 people left for better climes. Over the last decade New York has lost more of its population to other states (7.2%) than any other save Alaska (8%), followed by Illinois (6.8%), Connecticut (5.6%) and New Jersey (5.5%). Hmmm, what do these states have in common? Large tax burdens… Where are high-tax state exiles going? Zero income tax Florida drew $16.5 billion in adjusted gross income last year. Many have also fled to Arizona ($3.5 billion), Texas ($3.5 billion), North Carolina ($3 billion), Nevada ($2.3 billion), Colorado ($2.1 billion), Washington ($1.7 billion) and Idaho ($1.1 billion). Texas, Nevada and Washington don’t have income taxes.

Here’s an accompanying visual.

Once again, we see a pattern.

Tax policy obviously isn’t the only factor that drives migration between states, but it’s clear that lower-tax states tend to attract more migration, while higher-tax states tend to drive people away.

And keep in mind that when people move, their taxable income moves with them.

Which brings me back to my opening analysis about trends. Over time, the uncompetitive states are digging themselves into a hole. Migration (at least by people – the Golden Geese – who earn money and pay taxes) in any given year may not make a big difference, but the cumulative impact will wind up being very important.

P.S. Speaking of which, feel free to cast your vote for the state most likely to suffer fiscal collapse.

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Based on rhetoric, the Democratic Party is committed to a class-warfare agenda.

They want higher income tax rates, higher capital gains taxes, higher Social Security taxes, higher death taxes, a new wealth tax, and many other tax hikes that target upper-income taxpayers.

There are various reasons why they push for these class-warfare tax hikes.

I don’t pretend to know which factor dominates.

But that’s not important because I want to make a different point. Notwithstanding all their rhetoric, Democrats are sometimes willing to shower rich people with tax breaks.

The Wall Street Journal exposes the left’s hypocrisy in the fight over the deduction for state and local taxes.

Democrats have…grown more concentrated in the richest parts of the country. That explains the strange spectacle of a Democratic presidential field running on the most redistributionist agenda in memory even as Democrats in Congress try to expand a tax break for high-earners in the New York City, San Francisco and Los Angeles metropolitan areas. …Coastal Democrats have failed with gimmicks at the state and federal level to eliminate the SALT cap. The latest effort is the Restoring Tax Fairness for States and Localities Act, which passed the House Ways and Means Committee last week. …The bill would raise the SALT deduction cap in 2019 and eliminate it in 2020 and 2021. …The Tax Foundation found the biggest benefit from the unlimited deduction went to households with incomes above $1 million.

A related issue is the federal government’s special tax exemption for interest paid to holders of state and local government bonds.

I explained in 2013 why it’s bad tax policy.

Josh Barro explained the previous year why this tax break is a boon for the rich.

In 2011, 35,000 taxpayers making more than $200,000 a year paid no federal income tax. …61 percent of those avoided tax for the same reason: their income consisted largely of interest on tax-exempt municipal bonds. As Washington looks…to eliminate tax preferences for the wealthy, why not eliminate this exemption? …Nearly all of those bondholders are either for-profit corporations or individuals with high incomes. The higher your tax bracket, the greater the value of the tax preference… muni bonds have an unfortunate feature…subsidies are linked to the interest rate. That means issuers who must pay higher interest rates get more valuable subsidies. Perversely, the worse a municipality’s credit, the greater incentive it is given to borrow more money.

Needless to say, it’s not a good idea to have a tax break that benefits the rich while subsidizing profligate states like New Jersey and Illinois.

In a column for Real Clear Policy, James Capretta analyzes how Democrats are working hard to preserve a big loophole.

The push to get rid of the Cadillac tax is short-sighted for both parties, but particularly for the Democrats. …In its estimate of H.R. 748, CBO projects that Cadillac tax repeal would reduce federal revenue by $200 billion over the period 2019 to 2029, with more than half of the lost revenue occurring in 2027 to 2029. …When examined over the long-term, repeal of the Cadillac tax is likely to be one of the largest tax cuts on record. …If the Cadillac tax is repealed, the government will have less revenue to pay for the spending programs many in the party want to expand. And Republicans will be able to say that it was the Democrats, not them, who paved the way for this particular trillion dollar tax cut.

Not only is it a big tax cut to repeal the Cadillac tax, it’s also a tax cut that benefits the rich far more than the poor.

Here are some distributional numbers from the left-leaning Tax Policy Center. I’ve highlighted in red the most-important column, which shows that the top-20 percent get more than 42 percent of the tax cut while the bottom-20 percent get just 1.2 percent of the benefit.

For what it’s worth, I don’t care whether tax provisions tilt the playing field to the rich or the poor.

I care about good policy.

That’s why I like the Cadillac tax, even though it was part of the terrible Obamacare legislation.

In other words, I think principles should guide policy.

My Democratic friends obviously disagree. They beat their chests about the supposed moral imperative to “soak the rich,” but they’re willing to shower the wealthy with big tax breaks so long as key interest groups applaud.

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