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Posts Tagged ‘States’

When I wrote a few days ago that the Trump tax reform was generating good results, I probably should have specified that some parts of the country are not enjoying as much growth because of bad state tax policy.

As illustrated by my columns about Texas vs California and Florida vs New York, high-tax states are economic laggards compared to low-tax states.

This presumably helps to explain why Americans are voting with their feet by moving to states where the politicians are (at least in practice) less greedy.

Let’s look at some new evidence on the interaction of federal and state tax policy.

Writing for Forbes, Chuck DeVore of the Texas Public Policy Foundation shares data on how and why lower-tax state are out-performing higher-tax states.

Job growth has been running 80% stronger in low-tax states than in high-tax states since the passage of the Tax Cuts and Jobs Act of 2017 in December 2017. Understanding why holds important lessons for policy, economics, and politics. The new tax law scaled back the federal subsidy for high state and local taxes. …As a result of limiting the SALT deduction to $10,000, income tax filers in high-tax states saw a relatively smaller tax cut, losing out on about $84 billion since the tax code was changed. With $84 billion less to invest, the pace of job creation in the 23 high-tax states has slowed relative to the low-tax states, with the data suggesting a shift of almost 400,000 private sector jobs may have occurred.

Here are some of his numbers.

Prior to the tax reform’s enactment, annualized private sector job growth was 1.9% in the low-tax states from January 2016 to December 2017 compared to 1.4% in the high-tax states, giving the low-tax jurisdictions a comparatively modest advantage of 35% more rapid job growth over the 23-month period. Now, 17 months of federal jobs data suggest that the Tax Cuts and Jobs Act has increased the competitive advantage of 27 low-tax states where the average SALT deduction was under $10,000 in 2016 as compared to 23 high-tax taxes with average SALT deductions greater than $10,000. Private sector job growth is now running 80% faster in the low-tax states, 2% annualized compared to 1.1%, up from just a 35% advantage in the prior 23 months. …For California, the lost employment opportunity adds up to 153,000 positions since December 2017… New York’s employment growth was about 128,000 less than might have been the case had the SALT deduction not been capped.

And here’s his data-rich chart.

Based on previous evidence we’ve examined, these numbers are hardly a surprise.

Chuck suggests the right way for high-tax states to respond.

…if political leaders in states accustomed to taxing and spending far more than their more frugal peers wish to participate in higher rates of job creation, they should reform their own fiscal houses, rather than expect their neighbors to subsidize their high-spending ways.

Sadly, this doesn’t appear to be happening.

Politicians is high-tax states such as Illinois and New Jersey are trying to make their already-punitive systems even worse.

Based on what we’ve seen from Greece, that won’t end well.

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‘Two years ago, I wrote about how Connecticut morphed from a low-tax state to a high-tax state.

The Nutmeg State used to be an economic success story, presumably in large part because there was no state income tax.

But then an income tax was imposed almost 30 years ago and it’s been downhill ever since.

The last two governors have been especially bad news for the state.

As explained in the Wall Street Journal, Governor Malloy did as much damage as possible before leaving office.

The 50 American states have long competed for people and business, and the 2017 tax reform raises the stakes by limiting the state and local tax deduction on federal returns. The results of bad policy will be harder to disguise. A case in point is Connecticut’s continuing economic decline, and now we have even more statistical evidence as a warning to other states. The federal Bureau of Economic Analysis recently rolled out its annual report on personal income growth in the 50 states, and for 2017 the Nutmeg State came in a miserable 44th. …the state’s personal income grew at the slowest pace among all New England states, and not by a little. …The consistently poor performance, especially relative to its regional neighbors, suggests that the causes are bad economic policies… In Mr. Malloy’s case this has included tax increases starting in 2011 and continuing year after year on individuals and corporations… It is a particular tragedy for the state’s poorest citizens who may not be able to flee to other states that aren’t run by and for government employees.

Here’s some of the data accompanying the editorial.

Eric Boehm nicely summarized the main lesson from the Malloy years in a column for Reason.

If it were true that a state could tax its way to prosperity, Connecticut should be on a non-stop winning streak. Instead, state lawmakers are battling a $3.5 billion deficit. Companies including General Electric, Aetna, and Alexion, a major pharmaceutical firm, have left the state in search of a lower tax burden. Connecticut is looking increasingly like the Illinois of New England: A place where tax increases are no longer fiscally or politically realistic, even though budgetary obligations continue to grow and spending is completely out of control.

Unfortunately, the new governor isn’t any better than the old governor. The Wall Street Journal opined on Ned Lamont’s destructive fiscal policy.

Connecticut desperately needs a new economic direction. Unfortunately, the biennial budget soon to be signed by new Gov. Ned Lamont doubles down on policies that have produced abysmal results.The state’s economic indicators are grim. Connecticut routinely ranks near the bottom in surveys of economic competitiveness. Residents and businesses have been voting with their feet. According to the National Movers Study, only Illinois and New Jersey suffered more out-migration in 2018. General Electric left for Boston in 2016. This week, Farmington-based United Technologies Corp. announced it too will move its headquarters… Mr. Lamont’s budget seems designed to accelerate the decline. It increases spending by $2 billion while extending the state’s 6.35% sales tax to everything from digital movies to laundry drop-off services to “safety apparel.” It adds $50 million in taxes on small businesses, raises the minimum wage by 50%, and provides the country’s most generous mandated paid family medical leave. Florida and North Carolina must be licking their lips. …The state employee pension plan is underfunded by $100 billion—$75,000 per Connecticut household. A responsible budget would try to start filling the gap; the Lamont budget underfunds the teachers’ plan by another $9.1 billion, increasing the long-term liability by $27 billion. …Mr. Lamont proposes to slap a 2.25% penalty on people who sell a high-end home and move out of state. Having given up on attracting affluent families, he’s trying to prevent the ones who are here from leaving.

As one might expect, all this bad news is generating bad outcomes. Here are some details from an editorial in today’s Wall Street Journal.

…as a new study documents, more businesses are leaving Connecticut as they get walloped with higher taxes that are bleeding the state. Democrats in 2015 imposed a 20% surtax on top of the state’s 7.5% corporate rate, effectively raising the tax rate to 9%. They also increased the top income tax rate to 6.99% from 6.7% on individuals earning more than $500,000. The state estimated the corporate tax hike would raise $481 million over two years, but revenue increased by merely $323 million… Meantime, the state’s Department of Economic and Community Development, whose job is to strengthen “Connecticut’s competitive position,” in 2016 alone spent $358 million…to induce businesses to stay or move to the state. This means that Connecticut doled out twice as much in corporate welfare as it raked in from the corporate tax increase. …Thus we have Connecticut’s business model: Raise costs for everyone and then leverage taxpayers to provide discounts for a politically favored few. …The state has lost population for the last five years. …The exodus has depressed tax revenue.

And there’s no question that people are voting with their feet, as Bloomberg reports.

Roughly 5 million Americans move from one state to another annually and some states are clearly making out better than others. Florida and South Carolina enjoyed the top economic gains, while Connecticut, New York and New Jersey faced some of the biggest financial drains, according to…data from the Internal Revenue Service and the U.S. Census Bureau. Connecticut lost the equivalent of 1.6% of its annual adjusted gross income, as the people who moved out of the Constitution State had an average income of $122,000, which was 26% higher than those migrating in. Moreover, “leavers” outnumbered “stayers” by a five-to-four margin.

Here’s a chart from the article showing how Connecticut is driving away some of its most lucrative taxpayers.

Here’s a specific example of someone voting with their feet. But not just anybody. It’s David Walker, the former Comptroller General of the United States, and he knows how to assess a jurisdiction’s financial outlook.

…my wife, Mary, and I are leaving the Constitution State. We are saddened to do so because we love our home, our neighborhood, our neighbors, and the state. However, like an increasing number of people, the time has come to cut our losses… current state and local leaders have the willingness and ability to make the tough choices needed to create a better future in Connecticut, especially in connection with unfunded retirement obligations. …Connecticut has gone from a top five to bottom five state in competitive posture and financial condition since the late 1980s. In more recent years, this has resulted in an exodus from the state and a significant decline in home values.

All of this horrible news suggests that perhaps Connecticut should get more votes in my poll on which state will be the first to suffer fiscal collapse.

Incidentally, that raises a very troubling issue.

The former Governor of Indiana, Mitch Daniels, wrote last year for the Washington Post that we should be worried about pressure for a bailout of profligate states such as Connecticut.

…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. …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. …So where is a destitute governor to turn? Sooner or later, we can anticipate pleas for nationalization of these impossible obligations. …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 don’t forget other states that are heading in the wrong direction. Politicians from California, New York, New Jersey, and Illinois also will be lining up for bailouts.

Here’s the bottom line on Connecticut: As recently as 1990, the state had no income tax, which put it in the most competitive category.

But then politicians finally achieved their dream and imposed an income tax.

And in a remarkably short period of time, the state has dug a big fiscal hole of excessive taxes and spending (with gigantic unfunded liabilities as well).

It’s now in the next-to-last category and it’s probably just a matter of time before it’s in the 5th column.

P.S. While my former state obviously has veered sharply in the wrong direction on fiscal policy, I must say that I’m proud that residents have engaged in civil disobedience against the state’s anti-gun policies.

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Time for another edition of our long-running battle between the Lone Star State and the Golden State.

Except it’s not really a battle since one side seems determined to lose.

For instance, Mark Perry of the American Enterprise Institute often uses extensive tables filled with multiple variables when comparing high-performing states and low-performing states.

But when comparing California and Texas, sometimes all you need is one data source because it makes a very powerful point. Which is what he recently did with that data on one-way U-Haul rental rates between California cities and Texas cities.

There’s a very obvious takeaway from this data, as Mark explains.

…there is a huge premium for trucks leaving California for Texas and a huge discount for trucks leaving Texas for California. …U-Haul’s one-way truck rental rates are market-based to reflect relative demand and relative supply. In California there’s a relatively low supply of trucks available and a relatively high demand for trucks destined for Texas; in Texas there’s a relatively high supply of trucks and a relatively low demand for trucks going to California. Therefore, U-Haul charges 3-4 times more for one-way truck rentals going from San Francisco or LA to Houston or Dallas than vice-versa based on what must be a huge net outflow of trucks leaving California (leading to low inventory) and a net inflow of trucks arriving in Texas (leading to high inventory). …in 2016…the ratios for the same matched cities were much smaller, 2.2 to 2.4 to 1, suggesting that the outbound migration from California to Texas as reflected in one-way U-Haul truck rental rates must have accelerated over the last three years.

So why is California so unattractive compared to Texas?

To answer that question, this map from the Tax Foundation is a good place to start. It shows that California has the most punitive income tax of any state, while Texas is one of the sensible states with no income tax.

By the way, I sometimes get pushback from my leftist friends who point out that California’s 13.3 percent tax rate only applies to millionaires.

I don’t think that’s an effective argument since it makes zero sense to penalize a state’s most productive citizens. Especially when they’re the ones who can easily afford to move (and many of them are doing exactly that).

That being said, California pillages middle-class taxpayers as well. If some trendy young millennial wants to live in San Francisco, I wish that person all the luck in the world – especially since the 8 percent tax rate kicks in at just $44,377.

Now let’s ask the question of whether California residents (rich, poor, or middle class) are getting something for all the taxes they have to pay.

  • Is there any evidence that they are getting better schools? No.
  • How about data showing that they get better health care? No.
  • What about research indicating better infrastructure in the state? No.

Instead, they’re paying for a giant welfare state and for a lavishly compensated collection of bureaucrats.

P.S. There’s also plenty of international data showing big government isn’t the way to get good roads, schools, and healthcare.

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

P.P.P.S. Here’s my favorite California vs Texas joke.

P.P.P.P.S. Comparisons of New York and Florida tell the same story.

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If the people who advocate higher taxes really think it’s a good idea to give politicians more cash, why don’t they voluntarily send extra money with their tax returns?

Massachusetts actually makes that an easy choice since state tax forms give people the option of paying extra, yet tax-loving politicians such as Elizabeth Warren and John Kerry never avail themselves of that opportunity.

And the Treasury Department has a website for people who want to give extra money to the federal government, yet proponents of higher taxes (at least for you and me) never lead by example.

For lack of a better phrase, let’s call this type of behavior – not choosing to pay extra tax – conventional hypocrisy.

But what about politicians who support higher taxes while dramatically seeking to reduce their own tax payments? I guess we should call that nuclear-level hypocrisy.

And if there was a poster child for this category, it would be J.B. Pritzker, the Illinois governor who is trying to replace his state’s flat tax with a money-grabbing multi-rate tax.

The Chicago Sun Times reported late last year that Pritzker has gone above and beyond the call of duty to make sure his money isn’t confiscated by government.

…more than $330,000 in property tax breaks and refunds that…J.B. Pritzker received on one of his Gold Coast mansions — in part by removing toilets… Pritzker bought the historic mansion next door to his home, let it fall into disrepair — and then argued it was “uninhabitable” to win nearly $230,000 in property tax breaks. …The toilets had been disconnected, and the home had “no functioning bathrooms or kitchen,” according to documents Pritzker’s lawyers filed with Cook County Assessor Joseph Berrios.

Wow, maybe I should remove the toilets from my house and see if the kleptocrats in Fairfax County will slash my property taxes.

And since I’m an advocate of lower taxes (for growth reasons and for STB reasons), I won’t be guilty of hypocrisy.

Though Pritzker may be guilty of more than that.

According to local media, the tax-loving governor may face legal trouble because he was so aggressive in dodging the taxes he wants other people to pay.

Democratic Illinois Gov. JB Pritzker, his wife and his brother-in-law are under federal criminal investigation for a dubious residential property tax appeal that dogged him during his gubernatorial campaign last year, WBEZ has learned. …The developments demonstrate that the billionaire governor and his wife may face a serious legal threat arising from their controversial pursuit of a property tax break on a 126-year-old mansion they purchased next to their Gold Coast home. …The county watchdog said all of that amounted to a “scheme to defraud” taxpayers out of more than $331,000. …Pritzker had ordered workers to reinstall one working toilet after the house was reassessed at a lower rate, though it’s unclear whether that happened.

This goes beyond nuclear-level hypocrisy – regardless of whether he’s actually guilty of a criminal offense.

Though he’s not alone. Just look at the Clintons. And Warren Buffett. And John Kerry. And Obama’s first Treasury Secretary. And Obama’s second Treasury Secretary.

Or tax-loving international bureaucrats who get tax-free salaries.

Or any of the other rich leftists who want higher taxes for you and me while engaging in very aggressive tax avoidance.

To be fair, my leftist friends are consistent in their hypocrisy.

They want ordinary people to send their kids to government schools while they send their kids to private schools.

And they want ordinary people to change their lives (and pay more taxes) for global warming, yet they have giant carbon footprints.

P.S. There is a quiz that ostensibly identifies hypocritical libertarians.

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When I gave readers an opportunity to select their favorite political cartoonist back in 2013, they picked Michael Ramirez.

And I can understand, given the excellent options that I shared (here, here, here, and here).

But I now think I overlooked his true masterpiece, at least if salience is an issue. The cartoon he produced on politicians and bureaucrat unions perfectly identifies the problem that has produced gaping fiscal shortfalls in so many states and communities.

Simply stated, politicians and bureaucrats have figured out how to gang up against taxpayers.

The Chicago Tribune recently opined on this horrific example.

…a controversial state law…allowed a lobbyist for the Illinois Federation of Teachers, David Piccioli, to become certified as a substitute teacher in December 2006 by working one day at a Springfield elementary school — and to buy pension credit for his 10 previous years working as a lobbyist. That sweet deal qualified him for a pension windfall from a teachers retirement fund that as of late 2018 carried an unfunded liability of more than $75 billion-with-a-B. Because he also draws a pension from a previous job as a House Democratic aide, Piccioli’s total pension income now rises to nearly $100,000.

Sadly, Illinois courts routinely acquiesce to this kind of scam.

…the court upheld a dubious loophole that allowed government employees who left those jobs to work for their union in the private sector to still qualify for a public pension — with payouts based on their much higher salaries in their union roles. One example: Former Chicago labor boss Dennis Gannon, who started out working for the city, was able to retire at age 50 with a city pension based on his union salary of at least $240,000. The Supreme Court upheld that arrangement too.

Perhaps those actually were correct legal decisions.

But, if so, that underscores my original point about politicians and bureaucrat union working together to fleece taxpayers.

This story underscores the unfairness of a system that provides much higher levels of compensation for government bureaucrats compared to those toiling in the economy’s productive sector.

But it also can be seen as a Exhibit A for why Illinois is a fiscal black hole. Which is, of course, why the state’s politicians are so anxious and determined to get rid of the state’s flat tax.

And this explains why productive people are leaving.

Needless to say, this won’t end well.

P.S. I’m not going to put Mr. Piccioli in the Bureaucrat Hall of Fame. That high honor is reserved for people who actually had government jobs for longer than one day (such as the Philadelphia bureaucrat who “earned” a $50,000 annual pension after being employed for just 2-1/2 years. As a consolation prize, I will instead offer him up as a potential candidate for Bureaucrat of the Year.

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I used to think Texas vs. California was the most interesting and revealing rivalry among states. It was even the source of some clever jokes and cartoons.

But the growing battle between Florida vs. New York may now be even more newsworthy.

I wrote last month about how many entrepreneurs, investors and business owners are escaping bad tax policy by moving from the Empire State to the Sunshine State.

Not that we should be surprised.

Florida ranks #1 for economic freedom while New York languishes in last place.

A big reason for the difference is that Florida has no state income tax, which compares very favorably to the punitive system in New York.

And because the federal tax code no longer provides an unlimited deduction for state and local taxes, I expect the exodus from New York to Florida to accelerate.

What’s especially amusing is that Alexandria Ocasio-Cortez’s mother is one of the tax refugees.

Here are some excerpts from a report in the New York Post.

The mother of soak-the-rich Congresswoman Alexandria Ocasio-Cortez said she was forced to flee the Big Apple and move to Florida because the property taxes were so high. “I was paying $10,000 a year in real estate taxes up north. I’m paying $600 a year in Florida. It’s stress-free down here,” Blanca Ocasio-Cortez told the Daily Mail… Her daughter raised eyebrows with her pitch to hike the top marginal tax rate on income earned above $10 million to 70 percent. She has also gotten behind the so-called Green New Deal, which would see a massive and costly government effort.

The former Governor of Florida (and new Senator from the state) obviously is enjoying the fact that New York politicians are upset.

Here’s some of what Rick Scott wrote in today’s Wall Street Journal.

America is a marketplace where states are competing with each other, and New York is losing. Their loss is Florida’s gain… I would like to tell New Yorkers on behalf of the rest of America that our hearts go out to you for your sagging luxury real-estate market. But you did this to yourself, and you can fix it yourself. If you cut taxes and make state and local government efficient, maybe you can compete… I made more than 20 trips to high-tax states like California, Connecticut, Illinois, New York and Pennsylvania to lure businesses to Florida. The tax-happy leaders of those states were furious, which made the visits all the more enjoyable for me. They called me every name in the book. But they were the ones who raised taxes, and bad decisions have consequences. The elites in New York and Washington should commission a study of Florida to see what happens when conservative ideas are put into practice. …Florida’s economy is thriving, expanding at a record pace. …There’s a reason Rep. Alexandria Ocasio-Cortez’s mom left New York for Florida. And there’s a reason companies are fleeing high-tax states, bringing jobs with them to Florida.

I mentioned above that having no state income tax gives Florida a big advantage over New York.

Courtesy of Mark Perry, here a comprehensive comparison of the two states.

Wow. If this was a tennis tournament, the announcers would be saying “game, set, and match.” And if it was a boxing contest, it would be a knock-out.

The bottom line is that we should expect more rich people to escape New York and move to Florida because they’ll get to keep more of their money.

And we should expect more lower-income and middle-class people to also make the same move because Florida’s better policy means more jobs and more opportunity (sadly, Rep. Ocasio-Cortez has learned nothing from her mother’s move).

P.S. New York actually doesn’t do terribly in nationwide rankings for pension debt, though it is still below Florida.

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I wrote a couple of weeks ago about how New York is committing slow-motion fiscal suicide.

The politicians in Illinois must have noticed because they now want (another “hold my beer” moment?) to accelerate the already-happening collapse of their state.

The new governor, J.B. Pritzker, wants to undo the state’s 4.95 percent flat tax, which is the only decent feature of the Illinois tax system.

And he has a plan to impose a so-called progressive tax with a top rate of 7.95.

Here are some excerpts from the Chicago Tribune‘s report., starting with the actual plan.

Democratic Gov. J.B. Pritzker embarked on a new and potentially bruising political campaign Thursday by seeking to win public approval of a graduated-rate income tax that he contended would raise $3.4 billion by increasing taxes for the wealthy…for his long-discussed plan to replace the state’s constitutionally mandated flat-rate income tax. Currently, all Illinois residents are taxed at 4.95 percent… Pritzker’s proposal is largely reliant on raising taxes significantly on residents making more than $250,000 a year, with those earning $1 million and up taxed at 7.95 percent of their total income. …The corporate tax rate would increase from the current 7 percent to 7.95 percent, matching the top personal rate. …The governor’s proposal would give Illinois the second-highest top marginal tax rate among its neighboring states.

And here’s what would need to happen for the change to occur.

Before Pritzker’s plan can be implemented, three-fifths majorities in each chamber of the legislature must approve a constitutional amendment doing away with the flat tax requirement. The measure would then require voter approval, which couldn’t happen until at least November 2020. …Democrats hold enough seats in both chambers of the legislature to approve the constitutional amendment without any GOP votes. Whether they’ll be willing to do so remains in question. Democratic leaders welcomed Pritzker’s proposal… voters in 2014 endorsed the idea by a wide margin in an advisory referendum.

The sensible people on the Chicago Tribune‘s editorial board are not very impressed, to put it mildly.

…how much will taxes increase under a rate structure Pritzker proposed? You might want to cover your eyes. About $3.4 billion annually… That extraction of dollars from taxpayers’ pockets would be in addition to roughly $5 billion raised annually in new revenue under the 2017 income tax hike. …How did Springfield’s collection of all that new money work out for state government and taxpayers? Here’s how: Illinois remains deeply in debt, continues to borrow to pay bills, faces an insurmountable unfunded pension liability and is losing taxpayers who are fed up with paying more. The flight of Illinoisans to other states is intensifying with 2018’s loss of 45,116 net residents, the worst of five years of consistent, dropping population. …Illinois needs to be adding more taxpayers and businesses, not subtracting them. When politicians raise taxes, they aren’t adding. A switch to a graduated tax would eliminate one of Illinois’ only fishing lures to attract taxpayers and jobs: its constitutionally protected flat income tax. …Pritzker’s proposal, like each tax hike before it, was introduced with no meaningful reform on the spending side of the ledger. This is all about collecting more money. …In fact, the tax hike would come amid promises of spending new billions.

And here’s a quirk that is sure to backfire.

For filers who report income of more than $1 million annually, the 7.95 percent rate would not be marginalized; meaning, it would be applied to every dollar, not just income of more than $1 million. Line up the Allied moving vans for business owners and other high-income families who’ve had a bellyful of one of America’s highest state and local tax burdens.

The Tax Foundation analyzed this part of Pritzker’s plan.

This creates a significant tax cliff, where a person making $1,000,000 pays $70,935 in taxes, while someone earning one dollar more pays $79,500, a difference of $8,565 on a single dollar of income.

That’s quite a marginal tax rate. I suspect even French politicians (as well as Cam Newton) might agree that’s too high.

Though I’m sure that tax lawyers and accountants will applaud since they’ll doubtlessly get a lot of new business from taxpayers who want to avoid that cliff (assuming, of course, that some entrepreneurs, investors, and business owners actually decide to remain in Illinois).

While the tax cliff is awful policy, it’s actually relatively minor compared to the importance of this table in the Tax Foundation report. It shows how the state’s already-low competitiveness ranking will dramatically decline if Pritzker’s class-warfare plan is adopted.

The Illinois Policy Institute has also analyzed the plan.

Unsurprisingly, there will be fewer jobs in the state, with the losses projected to reach catastrophic levels if the new tax scheme is adjusted to finance all of the Pritzker’s new spending.

And when tax rates go up – and they will if states like Connecticut, New Jersey, and California are any indication – that will mean very bad news for middle class taxpayers.

The governor is claiming they will be protected. But once the politicians get the power to tax one person at a higher rate, it’s just a matter of time before they tax everyone at higher rates.

Here’s IPI’s look at projected tax rates based on three different scenarios.

The bottom line is that the middle class will suffer most, thanks to fewer jobs and higher taxes.

Rich taxpayer will be hurt as well, but they have the most escape options, whether they move out of the state or rely on tax avoidance strategies.

Let’s close with a few observations about the state’s core problem of too much spending.

Steve Cortes, writing for Real Clear Politics, outlines the problems in his home state.

…one class of people has found a way to prosper: public employees. …over 94,000 total public employees and retirees in Illinois command $100,000+ salaries from taxpayers…former Chicago Mayor Richard M. Daley, who earned a $140,000 pension for his eight years of service in the Illinois legislature. …Such public-sector extravagance has fiscally transformed Illinois into America’s Greece – only without all the sunshine, ouzo, and amazing ruins.

So nobody should be surprised to learn that the burden of state spending has been growing at an unsustainable rate.

Indeed, over the past 20 years, state spending has ballooned from $34 billion to $86 billion according to the Census Bureau. At the risk of understatement, the politicians in Springfield have not been obeying my Golden Rule.

And today’s miserable fiscal situation will get even worse in the near future since Illinois is ranked near the bottom when it comes to setting aside money for lavish bureaucrat pensions and other retirement goodies.

Indeed, paying off the state’s energized bureaucrat lobby almost certainly is the main motive for Pritzker’s tax hike. As as happened in the past, this tax hike is designed to finance bigger government.

Yet that tax hike won’t work.

Massive out-migration already is wreaking havoc with the state’s finances. And if Pritzker gets his tax hike, the exodus will become even more dramatic.

P.S. Keep in mind, incidentally, that all this bad news for Illinois will almost certainly become worse news thanks to the recent tax reform. Restricting the state and local tax deduction means a much smaller implicit federal subsidy for high-tax states.

P.P.S. I created a poll last year and asked people which state will be the first to suffer a fiscal collapse. Illinois already has a big lead, and I won’t be surprised if that lead expands if Pritzker is able to kill the flat tax.

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I shared data a couple of weeks ago showing that Florida is the freest state in America (for both overall freedom and economic freedom) while New York is in last place (in both categories).

Well, it seems that freedom has consequences when people can “vote with their feet.”

We’ll start with an op-ed in the Miami Herald by Ed Pozzuoli.

In a recent press conference, New York Gov. Andrew Cuomo…mentioned Florida as an attractive option for New Yorkers who are unhappy… a Census Bureau report late last year detailing the states that lost residents because of high taxes, overregulation and dwindling opportunities. Leading the list? New York. …what jurisdiction did the Census folks say benefits the most from domestic “in-migration? You guessed it — Florida… our low-tax, business-friendly welcome to asylum seekers from Big Government states like New York… It’s Florida’s low taxes and reasonable regulatory environment that attract businesses here. Florida ranks sixth among states for new business creation. …Unlike the federal government, Florida balances its budget and does so without an income tax. New York can keep its big progressive government.

And that “big progressive government” means onerous and punitive taxes, as the Wall Street Journal opined.

New York City’s combined state and local top rate of 12.7% hits taxpayers earning more than $1 million and is the second highest in the country after California. The deduction limit raised New York’s top rate by an effective 5%, though this was partially offset by the tax reform’s 2.6 percentage-point reduction in the federal top rate. …According to IRS data we’ve examined, New York state lost $8.4 billion in income to other states in 2016 (the latest available data), up from $4.6 billion annually on average during the prior four years. Florida raked in the most New York wealth. Mr. Cuomo says that “a taxpayer in Florida would see no increase, or a decrease” under the GOP tax reform and “Florida also has no estate tax.” New York’s 16% estate tax hits assets over $10.1 million. …Mr. Cuomo promised to let New York’s tax surcharge on millionaires expire. But he has extended it again and again and now wants to renew it through 2024 because he says the state needs the money. Meantime, he warns that a wealth exodus could force spending cuts for education and higher taxes on middle-income earners. All of this was inevitable, as we and others warned. Yet rather than propose to make the state’s tax burden more competitive, Mr. Cuomo rages against a tax reform that has helped the overall U.S. economy, even in New York.

I especially enjoy how Governor Cuomo is irked because his state’s profligacy is no longer subsidized by an unlimited federal deduction for state and local taxes.

Investor’s Business Daily shares a similar perspective.

New York Gov. Andrew Cuomo…we appreciate his recent frankness on taxes. …”I don’t believe raising taxes on the rich,” Cuomo said. “That would be the worst thing to do. You would just expand the shortfall. God forbid if the rich leave.” …In support of his comments, Cuomo cited “anecdotal” evidence that showed high-income earners are leaving the high-tax Empire State for other low-tax states. But the evidence isn’t merely anecdotal. It’s a fact. …From 2010 to mid-2017, New York had a net outmigration of over 1 million people, more than any other state. No, they’re not all rich. But many are. …the wealthy have choices that others don’t. One of those choices is to move if taxes become not merely burdensome, but punitive. That’s what’s happening in New York. …Many high-income taxpayers are leaving New York for low-tax states, tired of paying the state’s bills and then being demonized leftist activists for being “rich” and told they must give more.

Let’s close with some excerpts from a column in the Washington Times by Richard Rahn. He compares New York, Virginia, and Florida.

…many high-income New Yorkers have been moving their tax homes to Florida, undermining the New York tax base. …Florida imposes no state and local income taxes… Florida is booming, with a budget surplus, while New York is mired in debt. Only 50 years ago, New York had four times the population of Florida, and now Florida is larger than New York. …the state of Florida…created an environment where businesses could flourish without undue tax burdens and government interference. It went from being a poor state to a prosperous one. …citizens of New York should be asking: Why they are required to pay such high state and local income tax rates while the citizens of Florida get by perfectly well without any state income tax; Why they have three times more per capita debt than Floridians, and infrastructure that is in far worse shape; …Why it takes a third more of their citizens’ personal income to run the government than in Virginia or Florida; Why their state takes twice the percentage of per capita income in taxes than Virginia and Florida; …When it comes to taxes and government services, people’s feet tell more about how they feel than their mouths.

And if you want to know why so many people are traveling down I-95 from New York to Florida, this table from Richard’s column tells you everything you need to know.

For what it’s worth, there are people who are willing to pay extra tax to live in certain high-tax states. New York City has an allure for some people, as does California’s climate and scenery.

But are those factors enough to compensate for awful tax systems? Will they save those states from economic decay?

At best, they’ll delay the day of reckoning. For what it’s worth, I actually think New Jersey or Illinois will be the first state to fiscally self-destruct.

You can cast your vote by clicking here.

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I wrote a couple of days ago about America’s best and worst cities for pro-market policy, and I noted that there are several rankings of economic liberty for states and nations.

But what if you want to know the place with the most overall freedom? In other words, what is the most libertarian place to live based on both economic liberty and personal liberty?

If you don’t mind a bit of travel, the answer is New Zealand.

For those who prefer to stay in the United States, Will Ruger and Jason Sorens periodically crunch numbers to calculate Freedom in the 50 States.

Their previous edition had New Hampshire in first place, so let’s take a look at the newest version.

This 2018 edition of Freedom in the 50 States presents a completely revised and updated ranking of the American states on the basis of how their policies promote freedom in the fiscal, regulatory, and personal realms. …More than 230 policy variables and their sources are now available to the public on a new website for the study. …the 2018 edition provides annual data on economic and personal freedom and their components back to 2000. …Freedom in the 50 States is an essential desk reference for anyone interested in state policy and in advancing a better understanding of a free society.

The publication is loaded with data, as you’ll see from the following charts.

To put all this data in context, the report separately calculates fiscal freedom, regulatory freedom, and personal freedom.

We’ll start with the fiscal section, which includes variables about taxes and spending, as well as other measures such as debt and government employment.

For those interested, the report has plenty of analysis and explanation about the variables that are used and the weights that are assigned.

Most of us, though, simply want to see which states get good scores and which ones get bad scores.

I’m not surprised to see that zero-income-tax states – led by Florida – are at the top. And I’m also not surprised that flat-tax states – led by Pennsylvania – also are well represented.

I assume nobody is surprised to see New York in last place.

Now let’s shift to regulatory policy and see where the burden of red is most onerous.

This part of the ranking covers a range of issues, most notably controls on land use and restrictions on the use of markets in health care.

But there are other important variables, including the extent and burden of occupational licensing.

Indeed, before getting to the overall rankings for regulation, I want to share those scores because it is so galling and upsetting that politicians impose barriers that limit the freedom of people to earn income.

Colorado deserves hearty applause for being at the top, edging out Idaho by a narrow margin. And even though Vermont was near the bottom of the fiscal rankings, it merits a mention for being good on the issue of occupational licensing.

California deserves hearty condemnation for being in last place. And I’m not surprised to see states like Illinois and New Jersey near the bottom.

I’m very disappointed, however, that Texas and Florida have such a dismal record.

But let’s not fixate on just one of the variables. If we look at the rankings for all regulatory issues, Kansas is in first place, followed by Nebraska and Idaho.

The worst states (hardly a surprise) are New York, New Jersey, and California.

Now let’s combine fiscal policy and regulatory policy and see the report’s ranking for overall economic freedom.

Florida is in first place by a comfortable margin, followed by three other zero-income-tax states (though the absence of a state income tax does not guarantee a good score, as you can see from the poor performance of Alaska, Wyoming, and Washington).

New York wins the Booby Prize by a large margin.

Hawaii and California also stand out in a bad way.

The above table tells us which state enjoys the most economic liberty, but that doesn’t tell us where to live if you want the maximum amount of overall freedom.

To identify the nation’s most libertarian state, we also need to look at rankings for personal liberty.

This means, in part, whether people are harassed and persecuted for victimless crimes, but it also includes measures of educational freedom and gun rights.

Speaking of which, I can’t resist sharing the data on which states most respect the 2nd Amendment.

Kansas gets the best score, followed by Vermont(!), Arizona, Idaho, and Mississippi.

Hawaii is the worst state by a significant margin and we (again) find California near the bottom.

Another issue which is near and dear to my heart is asset forfeiture.

I am nauseated and disgusted that governments are allowed to steal property from people who have not been convicted of any wrongdoing.

So let’s applaud New Mexico, Nebraska, and New Hampshire for putting limits on this awful practice.

And let’s heap unending scorn on Rhode Island for having the nation’s worst track record on this issue.

But what happens when we combine all issue relating to personal freedom?

Well, that’s exactly what the authors did, which means we get a comprehensive ranking for personal freedom. I’m not surprised that Nevada, Colorado, and New Hampshire are in the top 5, but I’m surprised to see that Maine leads the pack.

Likewise, I guess I’m not too surprised that Texas and other bible-belt states are socially conservative.

But Hawaii next to last?!?

In any event, the report combines economic freedom and personal freedom and tells us which state could be considered the most libertarian.

And the winner is the Sunshine State of Florida, followed by New Hampshire, Indiana, Colorado, and Nevada. I’m surprised that Florida does so well, though some of the other high-scoring states make sense (especially when I look at data on who reads these columns).

By contrast, the most dirigiste state is New York. That doesn’t surprise me, and I’m also not shocked by some of the other bottom dwellers.

I’m tempted to end here since we’ve already surveyed so much information.

But there’s one final chart which hopefully should be very fascinating.

We just looked at the data on how states currently rank for overall liberty.

This final selection tells us which ones have been moving in the right direction and wrong direction since the turn of the century.

Kudos to Oklahoma for adopting a lot of good reform. Same for New Mexico. And it’s also interesting to see that several states from the Great Lakes region boosted their scores (with Illinois being a laggard, of course).

Vermont has the dismal distinction of having moved the fastest in the wrong direction (No wonder it’s the Moocher State).

Hawaii also deserves an unfavorable mention, while the deterioration of New Jersey and New York is hardly a surprise.

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I’ve written many times about people and businesses escaping high-tax states and moving to low-tax states.

This tax-driven migration rewards states with good policy and punishes those with bad policy.

And now we have some new data.

The Wall Street Journal recently opined on the updated numbers.

…some states are booming while others are suffering a European-style sclerosis of population loss and slow economic growth. …The eight fastest-growing states by population last year…also experienced rapid employment and GDP growth spurred by low tax rates and policies generally friendly to business and job creation. Nevada, Arizona, Texas, Washington, Utah, Florida and Colorado ranked among the eight states with the fastest job growth this past year, according to the Bureau of Labor Statistics. Nevada, Texas, Washington and Florida have no income tax. …Then there’s California. Despite its balmy weather and thriving tech industry, the Golden State last year lost more people to other states than it gained from foreign immigration. Since 2010, a net 710,000 people have left California for other states. …New York Gov. Andrew Cuomo recently blamed cold weather for the state’s population exodus, but last year frigid New Hampshire with no income tax attracted 3,900 newcomers from other states. …Illinois’s population has declined by 157,000 over the past five years… Cold weather? While Illinois’s population has declined by 0.8% since 2010, Indiana’s has grown 3.1% and Wisconsin’s by 2.2%.

Here’s my favorite part of the editorial.

America as a whole can thank the Founders for creating a federalist system that allows the economic and political safety valve of interstate policy competition.

Amen. Federalism is great for a wide range of reasons, but I especially like that people have the freedom to escape when policy is decentralized.

Companies escape high taxes.

Honeywell International Inc. is snubbing New Jersey and heading south. …Honeywell’s move follows other companies that have moved corporate offices out of states with elevated costs of living and high taxes, including General Electric Co.’s relocation of its headquarter to Boston from Connecticut. Those costs were exacerbated by a new law last year that removed state income-tax deductions on federal taxes. North Carolina has a lower state income tax than New Jersey for higher-paid employees.

Former governors escape high taxes.

Gov. Paul LePage said Monday that he plans to move to Florida for tax reasons… LePage and his wife, Ann, already own a house in Florida and often vacation there. He said he would be in Maine from April to September. Asked where he would maintain his legal residency, LePage replied Florida. …”I have a house in Florida. I will pay no income tax and the house in Florida’s property taxes are $2,000 less than we were paying in Boothbay. … At my age, why wouldn’t you conserve your resources and spend it on your family instead of on taxes?” …LePage often has cited Maine’s income tax – currently topping out at 7.15 percent, down from a high of 8.5 percent when he took office – as an impediment to economic growth and attracting/retaining residents.

Even sports stars avoid class-warfare tax regimes.

Bryce Harper and Manny Machado…will “take home” significantly higher or lower pay depending on which teams sign them and the applicable income tax rates in the states where those teams are based. This impact could be worth tens of millions of dollars. …For example, assume the Cubs and Dodgers offer identical eight-year, $300 million contracts to Machado. Lozano would warn the Dodgers that their offer is decidedly inferior. As a Dodger, Machado’s million-dollar wages would be subject to the top bracket of California’s state income tax rate. At 13.3%, it is the highest rate in the land. In contrast, as a Cub, Machado would be subject to the comparatively modest 4.95% Illinois income tax rate. …the difference in after-tax value of these two $300 million contracts would be $14 million.

Though Lozano needs to warn Machado that the recent election results significantly increase the danger that Illinois politicians will finally achieve their long-held goal of changing the state constitution and replacing the flat tax with a class-warfare system.

Since we’re talking about the Land of Lincoln, it’s worth noting that the editors at the Chicago Tribune understand the issue.

Every time a worker departs, the tax burden on those of us who remain grows. The release on Wednesday of new census data about Illinois was alarming: Not only has the flight of citizens continued for a fifth straight year, but the population loss is intensifying. This year’s estimated net reduction of 45,116 residents is the worst of these five losing years. …Residents fed up with the economic climate here are heading for less taxaholic, jobs-friendlier states. …Many of them left because they believed Illinois is headed in the wrong direction. Because Illinois politicians have raised taxes, milked employers and created enormous public indebtedness that the pols want to address with … still more taxation. …How bad does the Illinois Exodus have to get before its dominant politicians understand that their debt-be-damned, tax-and-spend policies are ravaging this state?

Wow, no wonder Illinois is perceived to be the first state to suffer a fiscal collapse.

Let’s now zoom out and consider some national implications.

Chris Edwards took a close look at the data and crunched some numbers.

The new Census data confirms that people are moving from tax-punishing places such as California, Connecticut, Illinois, New York, and New Jersey to tax-friendly places such as Florida, Idaho, Nevada, Tennessee, and South Carolina. In the chart, each blue dot is a state. The vertical axis shows the one-year Census net interstate migration figure as a percentage of 2017 state population. The horizontal axis shows state and local household taxes as a percentage of personal income in 2015. …On the right, most of the high-tax states have net out-migration. …On the left, nearly all the net in-migration states have tax loads of less than 8.5 percent. …The red line is fitted from a simple regression that was highly statistically significant.

Here’s the chart.

Professor Glenn Reynolds wrote a column on tax migration for USA Today.

He starts by warning states that it’s a very bad recipe to repel taxpayers and attract tax consumers.

IRS data show that taxpayers are migrating from high-tax states like New York, Illinois, and California to low-tax states like Texas and Florida. …In time, if taxpayers tend to migrate from high-tax states to low-tax states, and if people receiving government benefits tend to stay in place or migrate from lower-benefit states to higher-benefit states, then over time lower-tax states will tend to accumulate more people with high earnings, while higher-benefit states will tend to accumulate more people who live on the dole. …if high-benefits states are also high-tax states (as is often the case) since then states with high benefits will accumulate more people who draw on them, while shedding the taxpayers they need to support them. The problem is that the result isn’t stable: High-tax, high-benefit states will eventually go bankrupt because they won’t retain enough taxpayers to support their welfare spending.

He then makes a very interesting observation about the risk that people who leave states such as New York, Illinois, California, and New Jersey may bring their bad voting habits to their new states.

…migrants from high tax states might bring their political attitudes with them, moving to new, low-tax states for the economic opportunity but then supporting the same policies that ruined the states they left. This seems quite plausible, alas, and I’ve heard Coloradans lament that the flow of Californians to their state involved a lot of people doing just that. …If I were one of those conservative billionaires…I might try spending some of the money on some…sort of welcome wagon for blue state migrants to red states. Something that would explain to them why the place they’re moving to is doing better than the place they left, and suggesting that they might not want to vote for the same policies that are driving their old home states into bankruptcy.

Glenn makes a very good point.

As part of my work on defending TABOR in Colorado, I often run into people who fret that the state has moved in the wrong direction because of migration from left-leaning states.

Though Chuck DeVore shared some data on how migrants to Texas are more conservative than people born in the state.

I’ll close today’s column with a helpful map from the Tax Foundation.

All you really need to know is that you should move if you live in a blue state and you should erect a no-leftists-allowed sign if you live in a gray state.

P.S. Everything I wrote about the benefits of tax migration between states also applies to tax migration between nations.

I will never stop defending the right of labor and capital to escape high-tax regimes. I especially enjoy the hysterical reactions of folks on the left, who think that my support of fiscal sovereignty means that I’m “trading with the enemy,” being disloyal to my government, or that I should be tossed in jail.

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Like any sensible person, I want victimless crimes to be legalized. In part because I believe in freedom, but also for utilitarian reasons.

  • I don’t approve of drugs and I’ve never used drugs, but I think the social harm of prohibition is greater than the social harm of legalization.
  • I don’t particularly like alcohol and I am almost a teetotaler, but I’m glad there’s now a consensus that the social harm of prohibition was greater than the social harm of legalization.
  • I don’t approve of prostitution and I’ve never consorted with a prostitute (other than the political ones in DC), but I think the social harm of prohibition is greater than the social harm of legalization.

So it won’t surprise you to learn that I want gambling to be legal because the social harm of prohibition is greater than the social harm of legalization.

But that definitely doesn’t mean I want government to be in charge, which is why I’m not a fan of state-sponsored lotteries.

Joe Setyon, in a column for Reason, points out that politicians are the only group that actually benefits from these schemes.

At some point in the near future, the record-high Mega Millions jackpot is going to make someone very, very rich. But as is usually the case when it comes to the lottery, the biggest winner will be the government. …there are a few things us suckers need to keep in mind about the lotto. First, the majority of lottery revenue goes back to the government. In 2015, The Atlantic estimated that 40 percent of all lottery ticket sales are allocated to state governments. …Meanwhile, some states that allow lotteries crush their competition with strict gambling regulations. In Texas, for instance, most forms of gambling are illegal. This means the government has a near-monopoly. The double standard for public and private gambling operations is obvious. Ultimately, the lottery system is a kind of regressive tax on low-income earners. “If the promised return is by far illusory—and it is—it would be hard to argue that those purchases do not constitute a tax on those who believe the state’s hype,” Fiscal Policy Institute research associate Brent Kramer wrote in 2010.

And here’s an article from CNBC that reveals the unpalatable tax consequences for the “lucky” people who happen to win a big prize.

…there’s at least one guaranteed recipient of a chunk of the loot — the IRS. …If you happen to beat the astronomical odds and hit all winning numbers in either game, be aware that the taxation of your prize starts before even reaching you. Whether you take your haul as a lump sum or as an annuity spread out over three decades, your win is reduced by a 24 percent federal tax withholding… The immediate cash option for Mega Millions is $904 million. The federal withholding would reduce that by $217 million. For the $354.3 million Powerball lump sum, it would mean $85 million getting shaved off the top. …However, that’s just the start of what you’d owe. The top income tax rate for individuals is 37 percent… That rate applies to adjusted gross income of $500,000 or more. In other words, hitting either jackpot would mean facing that top rate. …On top of the federal withholding, you’ll owe state taxes on the money unless you live where lottery wins are untaxed. …Translation: You might pay north of 45 percent altogether in taxes, depending on where you purchased the ticket and where you live.

In other words, the government pillages people when they buy tickets.

And then the government pillages the tiny fraction of people who actually win something.

As I wrote above, the only real winners are politicians.

The biggest losers, by the way, are poor people.

Arthur Brooks of the American Enterprise Institute summed up this sad state of affairs in a column for the Wall Street Journal.

Powerball—the lottery shared by 44 states, the District of Columbia and two territories—is just one of the sweepstakes run by 47 jurisdictions in the U.S. These games produce nearly $70 billion a year in government revenue and enjoy profits of about 33%—much higher than margins in the private gambling industry. Who are these lotteries’ most loyal customers? Poor people. …the poorest third of Americans buy more than half of all lotto tickets… Scholars have dug up evidence that states intentionally direct such ads at vulnerable citizens. A marketing plan for Ohio’s lottery some years back recommended scheduling campaigns to coincide with the distribution of “government benefits, payroll and Social Security payments.” …the average return from $1 spent on lottery tickets is 52 cents… After a state introduces the lotto, the bottom third of households shift about 3% of their food expenditures and 7% of their mortgage payments, rent and other bills. Effectively, the lottery works like a regressive tax. …Is there any set of policies more contradictory than pushing lotto tickets on poor people, and then signing them up for welfare programs that make them financially dependent on the government?

Here’s some additional analysis from the Wall Street Journal, this time from Holman Jenkins.

Gambling is what economists call an “inferior good”—demand is higher among those at the lower end of the income scale. As economist Sam Papenfuss argued in a 1998 paper, state-sponsored gambling became popular as a way for high-income taxpayers to recoup some of the money spent on programs for the poor. State-sponsored gambling in the form of lotteries (now in 44 states) arrived on the same antitax wave that gave us property-tax caps and other antitax measures in the 1970s and ’80s. It should not surprise anyone that Democrats, as big supporters of the welfare state, have been the biggest supporters (though by no means exclusively so) of gambling as a way to finance it.

Last but not least, here are excerpts from a column I wrote for the Washington Times more than 20 years ago.

…government-run lotteries represent bad public policy. The No. 1 objection is that they lead to more government spending. …Perhaps even more disturbing, government lotteries victimize the poor. More than any other group, lower-income residents are the ones who play the lottery, often shelling out hundreds of dollars each year in the hope of striking it rich. Yet these are precisely the people who should avoid lotteries. As an investment, lotteries are lousy, paying out only about half of what they take in. …why should state governments be running lotteries? If nothing else, lotteries show how much better consumers are treated by the free market system. Private gambling operations pay out about 90 cents for every dollar wagered (even higher for games such as blackjack), a far better deal than the miserly return provided by government-run lotteries. …This analysis applies to illegal gambling as well. Bookies traditionally allow customers to bet against the point spread for sporting events, and they make their money by applying a 10 percent charge on the money wagered by those who make losing bets.

Two decades later and I wouldn’t change a single thing I wrote.

I don’t like when politicians mistreat rich people, but I get far more upset when they do things that impose disproportionate costs on poor people. This is one of the reasons I don’t like government flood insurance, Social Security, the Export-Import Bank, the mortgage interest deduction, or the National Endowment for the Arts.

And lotteries definitely belong on that list as well.

I’m not a paternalist. I support legal gambling and I don’t want to prohibit poor people from making (what I think) are misguided decisions.

But at least leave the gambling to the private sector so poor people will get back, on average, 90 cents of every dollar they bet.

P.S. I just had a horrifying thought. What if politicians decided to legalize prostitution because they wanted more revenue. But instead of legalizing and taxing (like they do – often to excess – with marijuana), what if they followed the lottery approach and we wound up with government-run brothels?!?

P.P.S. To be fair, the government will continue to give you food stamps if you become a lottery millionaire.

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I recently wrote about the Tax Foundation’s State Business Tax Climate Index, which is a snapshot of current competitiveness (New Jersey is in last place, which shouldn’t surprise anyone).

But what if we want to know which states are moving in the right direction or wrong direction?

If so, the best document to review is Chris Edwards’ Fiscal Policy Report Card on America’s Governors.

The new edition just came out, so I immediately looked at the rankings. The nation’s best governor – by a comfortable margin – is Susana Martinez of New Mexico.

She is joined by four other governors who earned top marks.

Eight governors, including two Republicans, were in the cellar.

The report has some other data worth sharing.

Here’s a chart that shows what has happened to state spending this century. What caught my eye is the boom-bust cycle of excessive spending growth when the economy is growing (and generating lots of revenue) and cutbacks during the downturn.

Yet another argument for spending caps, such as TABOR in Colorado.

Last but not least, the report included some analysis on tax-driven migration (the topic we covered last week).

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Back in April, I chatted with Stuart Varney about how some states were in deep trouble because they were being squeezed by having to finance huge unfunded liabilities for bureaucrats, yet they were constrained by the fact that taxpayers have the freedom to move when tax burdens become excessive.

I now have a reason to share the interview because Chris Edwards described this phenomenon of tax-driven migration in a new column for the Daily Caller.

New Jersey’s richest person, David Tepper, moved with his hedge fund business to Florida in 2016. That single move cost the state of New Jersey up to $100 million a year in lost income taxes. Yet, this year, New Jersey’s Democratic governor Phil Murphy hiked the top income tax rate from 8.97 to 10.75 percent. Murphy wanted to raise revenue, but the hike won’t do if it prompts more of the rich to leave. The top 1 percent in New Jersey pay 37 percent of the state’s income taxes. Connecticut is also losing its wealthiest residents after tax hikes by Democratic governor Dan Malloy. In recent years, the state has lost stock trading entrepreneur Thomas Peterffy (worth $20 billion), executive C. Dean Metropoulos ($2 billion), and hedge fund managers Paul Tudor Jones ($4 billion) and Edward Lampert ($3 billion). Those folks all fled to Florida, which has no income tax or estate tax. …High taxes are driving the wealthy out of California. Ken Fisher moved Fisher Investments from California to Washington state, which also has no income tax. The billionaire said he wanted a lower-tax location for his 2,000 employees. Mark Spitznagel moved his Universal Investments from California to Florida, saying that “Florida’s business-friendly policies, which are so different from California’s, offer the perfect environment for this.” The “tax freedom exodus” will accelerate in the wake of the 2017 federal tax law. The law capped the deduction for state and local taxes, which subjected 25 million mainly higher-income households to the full tax burden imposed in high-tax states.

It’s important to ask, though, whether these moves are a trend or just random.

In a more detailed study he produced, Chris crunched that national data and found there is a relationship between tax burdens and migration patterns.

It’s not a perfect relationship, of course, since there are many factors that might lead households to move across state lines.

But tax is definitely part of the equation, especially since high-tax states no longer receive a big indirect subsidy from Uncle Sam.

A column in the Wall Street Journal explores this aspect of the issue.

…real-estate professionals say they are beginning to see early signs of an exodus to low-tax states. “I’ve seen a huge increase in the number of clients who want to purchase in Palm Beach to establish residency in Florida,” says Chris Leavitt, director of luxury sales at Douglas Elliman Real Estate in Palm Beach. …Real-estate developer David Hutchinson, president of Ketchum, Idaho-based VP Cos., is touting the tax advantages of living in Nevada on his company website… The border between California and Nevada bisects Lake Tahoe. Californians to the west can pay a state income-tax rate of up to 13.3%, while Nevada residents just 30 minutes to the east pay no state income taxes.

A Democratic political consultant warns that his party could be hurt.

With state deductions now capped at $10,000, the cost of living in states such as California and New York – where state taxes are notoriously high – is increasing substantially. This has the potential to lead both middle-class families, and even the wealthy, to begin questioning whether it is time to move to a more tax-friendly state. …In one high-profile example of the impact of high taxes, professional golfer Phil Mickelson recently slammed California’s taxes and threated to leave the state. “If you add up all the federal and you look at the disability and the unemployment and the Social Security and the state, my tax rate’s 62, 63 percent,” Mickelson said. …New York Gov. Andrew Cuomo – seeking re-election this year and a potential 2020 Democratic presidential contender – recognizes the threat that tax migration may pose. “If you lose the taxpayers, you lose the revenue,” Cuomo said in December.

Though maybe it would be better for Governor Cuomo to say “lost the revenue.”

Here’s another chart from Chris Edwards’ study. The light-blue states are attracting the most new residents (i.e., taxpayers) while the bright-red states (like New York) are losing the most residents (former taxpayers).

Needless to say, the states with better tax policy tend to be net recipients of taxpayers, and taxable income.

In closing, it’s important to understand that tax-motivated migration also exists between countries.

Here are some excerpts from a column in the New York Times.

When a country begins to fall into economic and political difficulty, wealthy people are often the first to ship their money to safer havens abroad. The rich don’t always emigrate along with their money, but when they do, it is an even more telling sign of trouble. …In a global population of 15 million people each worth more than $1 million in net assets, nearly 100,000 changed their country of residence last year. …In 2017, the largest exoduses came out of Turkey (where a stunning 12 percent of the millionaire population emigrated) and Venezuela. As if on cue, the Turkish lira is now in a free fall. There were also significant migrations out of India under the tightening grip of its overzealous tax authorities… Millionaire migrations can be a positive sign for a nation’s economy. The losses for India, Russia and Turkey were gains for havens like Canada and Australia, joined lately by the United Arab Emirates. …Millionaires move money mainly out of self-interest, to find more rewarding or safer havens. There aren’t a lot of them, but they can tell us a great deal about what is going wrong — and right — in a country’s economic and political ecosystems. Leaders who create the right conditions to keep millionaires home will find that all of their residents — not just the wealthy ones — are richer for it.

I like footloose millionaires because – as discussed in the article – they act as canaries in the coal mine. When they start moving, that sends a helpful signal to the rest of us.

And I also cheer migrating millionaires since they can cause big Laffer-Curve effects. And that puts an external constraint on the greed of politicians.

Which helps ordinary taxpayers like you and me since politicians generally use higher tax burden on the rich as a softening-up tactic before grabbing more money from the masses.

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Politicians who preach class warfare repeatedly assert that we need higher taxes on “the rich.”

Indeed, that’s been the biggest political issue (and oftentimes biggest economic issue) in every recent tax fight (the Trump tax reform and Obama’s fiscal cliff), as well as the issue that generates the most controversy when discussing tax reform.

So it seems almost inconceivable that the class-warfare crowd would support a change to the tax code that would only benefit the top-10 percent, right?

Yet that’s exactly what’s happening in the fight over the deduction for state and local taxes.

Democrats want to restore an unlimited deduction, thereby enabling people to shield more of their income from tax. But, as the Tax Foundation notes, that change only produces benefits for upper-income taxpayers.

Itemized deductions such as the SALT deduction are mostly utilized by higher-income individuals. As such, any change to the SALT deduction will chiefly impact them. In addition, the value of a deduction increases as a taxpayer’s statutory tax rate increases. A deduction against the top rate of 37 percent is more valuable than a deduction against the 32 percent tax rate. We estimate that eliminating the SALT deduction cap would have no impact on taxpayers in the bottom two income quintiles and a negligible impact on taxpayers in the third and fourth quintiles. …However, taxpayers in the top 5 and 1 percent of income earners would see an increase in after-tax income of 1.6 percent and 3.7 percent respectively.

And if restoring the deduction is “paid for” by raising the corporate tax rate, the net effect is to raise taxes on the bottom-90 percent in order to give a tax to top-10 percent.

Or, to be more precise, to give a tax cut to the top-1 percent.

Some of you may be thinking that the Tax Foundation leans right and therefore can’t be trusted.

So let’s look at some research from the Tax Policy Center, which is a joint project of the left-leaning Urban Institute and left-leaning Brookings Institution.

Only about 9 percent of households would benefit from repeal of the Tax Cuts and Jobs Act’s (TCJA) $10,000 cap on the state and local property tax (SALT) deduction, and more than 96 percent of the tax cut would go to the highest-income 20 percent of households… For all middle-income taxpayers, the average tax cut would be $10. Those in the top 1 percent would pay an average of $31,000, or 2 percent of after-tax income, less.

And here’s the TPC chart showing how almost all the tax relief goes to upper-income taxpayers.

So what’s going on? Why are Democrats fighting for an idea that would give the rich a $31,000 tax cut while only providing $10 of relief for middle-class taxpayers?!?

The simple answer is that they think the loophole is a very valuable way of facilitating higher taxes and bigger government at the state and local level. And they’re right, so I don’t blame them.

But it’s nonetheless very revealing that they are willing to jettison their tax-the-rich rhetoric when it interferes with their make-government-bigger agenda.

P.S. This “SALT” debate strikes me as being similar to the Laffer-Curve debate, which requires folks on the left to choose whether it’s more important to punish rich people or to get more revenue to spend.

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Yesterday, I wrote about the newest edition of Economic Freedom of the World, which is my favorite annual publication.

Not far behind is the Tax Foundation’s State Business Tax Climate Index, which is sort of the domestic version of their equally fascinating (to a wonk) International Tax Competitiveness Index.

And what can we learn from this year’s review of state tax policy? Plenty.

…the specifics of a state’s tax structure matter greatly. The measure of total taxes paid is relevant, but other elements of a state tax system can also enhance or harm the competitiveness of a state’s business environment. The State Business Tax Climate Index distills many complex considerations to an easy-to-understand ranking.

That’s the theory, but what about the results?

Here are the best and worst states.

If you pay close attention, there’s a common thread for the best states.

The absence of a major tax is a common factor among many of the top 10 states. …there are several states that do without one or more of the major taxes: the corporate income tax, the individual income tax, or the sales tax. Wyoming, Nevada, and South Dakota have no corporate or individual income tax (though Nevada imposes gross receipts taxes); Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire, Montana, and Oregon have no sales tax.

By the way, both Utah and Indiana are among the nine states with flat tax systems, so every top-10 state has at least one attractive feature.

But if you peruse the bottom-10 states, you’ll find that every one of them has an income tax with “progressive” rates that punish people for contributing more to the economy.

Indeed, half of the states on that unfortunate list are part of the “Class-Warfare Graduated Tax” club.

Not a desirable group, assuming the goal is faster growth and more jobs.

The Tax Foundation’s report also is worth reading because it reviews some of the academic evidence about the superiority of pro-growth tax systems.

Helms (1985) and Bartik (1985) put forth forceful arguments based on empirical research that taxes guide business decisions. Helms concluded that a state’s ability to attract, retain, and encourage business activity is significantly affected by its pattern of taxation. Furthermore, tax increases significantly retard economic growth when the revenue is used to fund transfer payments. Bartik concluded that the conventional view that state and local taxes have little effect on business is false. Papke and Papke (1986) found that tax differentials among locations may be an important business location factor, concluding that consistently high business taxes can represent a hindrance to the location of industry. …Agostini and Tulayasathien (2001) examined the effects of corporate income taxes on the location of foreign direct investment in U.S. states. They determined that for “foreign investors, the corporate tax rate is the most relevant tax in their investment decision.” Therefore, they found that foreign direct investment was quite sensitive to states’ corporate tax rates. Mark, McGuire, and Papke (2000) found that taxes are a statistically significant factor in private-sector job growth. Specifically, they found that personal property taxes and sales taxes have economically large negative effects on the annual growth of private employment. …Gupta and Hofmann (2003) regressed capital expenditures against a variety of factors… Their model covered 14 years of data and determined that firms tend to locate property in states where they are subject to lower income tax burdens.

None of this research should come as a surprise.

Businesses aren’t moving from California to Texas because business executives prefer heat and humidity over ocean and mountains.

The bottom line is that tax rates matter, whether we’re looking at state data, national data, or international data.

Let’s close by sharing a map from the report. Simply stated, red is bad and teal (or whatever that color is) is good.

P.S. My one complaint about this report from the Tax Foundation is that it doesn’t include the overall fiscal burden. Alaska and Wyoming score well because they have small populations and easily fund much of their (extravagant) state budgets with energy-related taxes. If data on the burden of state government spending was included, South Dakota would be the best state.

P.P.S. Unsurprisingly, Americans are moving from high-tax states to low-tax states.

P.P.P.S. It’s also no surprise to find New Jersey in last place.

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If the goal is higher living standards, then higher levels of productivity are necessary. And that requires entrepreneurship and innovation.

But bad tax policy can be an obstacle to the economic choices that create a better future.

I’ve already shared lots of research showing how punitive tax rates undermine growth, but it never hurts to add to the collection.

Let’s look at a new study by Ufuk Akcigit, John Grigsby, Tom Nicholas, and Stefanie Stantcheva. Here’s the issue they investigated.

…do taxes affect innovation? If innovation is the result of intentional effort and taxes reduce the expected net return from it, the answer to this question should be yes. Yet, when we think of path-breaking superstar inventors from history…we often imagine hard-working and driven scientists, who ignore financial incentives and merely seek intellectual achievement. More generally, if taxes affect the amount of innovation, do they also affect the quality of the innovations produced? Do they affect where inventors decide to locate and what firms they work for? …In this paper, we…provide new evidence on the effects of taxation on innovation. Our goal is to systematically analyze the effects of both personal and corporate income taxation on inventors as well as on firms that do R&D over the 20th century.

To perform their analysis, the economists gathered some very interesting data on the evolution of tax policy at the state level. Such as when personal income taxes were adopted.

By the way, I may have discovered an error. They show Connecticut’s income tax being imposed in 1969, but my understanding is that the tax was first levied less than 30 years ago.

In any event, the authors also show how, over time, states have taxed upper-income households.

They look at 20th-century data. If you want more up-to-date numbers, you can click here.

But let’s not digress. Here are some of the findings from the study.

We use OLS to study the baseline relationship between taxes and innovation, exploiting within-state tax changes over time, our instrumental variable approach and the border county design. On the personal income tax side, we consider average and marginal tax rates, both for the median income level and for top earners. Our corporate tax measure is the top corporate tax rate. We find that personal and corporate income taxes have significant effects at the state level on patents, citations (which are a well-established marker of the quality of patents), inventors and “superstar” inventors in the state, and the share of patents produced by firms as opposed to individuals. The implied elasticities of patents, inventors, and citations at the macro level are between 2 and 3.4 for personal income taxes and between 2.5 and 3.5 for the corporate tax. We show that these effects cannot be fully accounted for by inventors moving across state lines and therefore do not merely reflect “zero-sum” business-stealing of one state from other states.

Here are further details about the statewide impact of tax policy.

A one percentage point increase in either the median or top marginal tax rate is associated with approximately a 4% decline in patents, citations, and inventors, and a close to 5% decline in the number of superstar inventors in the state. The effects of average personal tax rates are even larger. A one percentage increase in the average tax rate at the 90th income percentile is associated with a roughly 6% decline in patents, citations, and inventors and an 8% decline in superstar inventors. For the average tax rate at the median income level, the effects are closer to 10% for patents, citations, and inventors, and 15% for superstar inventors.

At the risk of understatement, that’s clear evidence that class-warfare policy has a negative effect.

The study also looked at several case studies of how states performed after significant tax changes.

…case studies provide particularly clear visual evidence of a strong negative relationship between taxes and innovation. When combined with the macro state-level regressions, the instrumental variable approach and the border county analysis, the results overall bolster the conclusion that taxes were significantly negatively related to innovation outcomes at the state level.

Here’s the example of Delaware.

For what it’s worth, we have powerful 21st-century examples of the consequences of bad tax policy. Just think New JerseyCalifornia, and Illinois.

But I’m digressing again.

Back to the study, were we find that the authors also look at how tax policy affects the decisions of people and companies.

We then turn to the micro-level, i.e., individual firms and inventors. …we find that taxes have significant negative effects on the quantity and quality (as measured by citations) of patents produced by inventors, including on the likelihood of producing a highly successful patent (which gathers many citations). At the individual inventor level, the elasticity of patents to the personal income tax is 0.6-0.7, and the elasticity of citations is 0.8-0.9. …we show that individual inventors are negatively affected by the corporate tax rate, but much less so than by personal income taxes. …We find that inventors are significantly less likely to locate in states with higher taxes. The elasticity to the net-of-tax rate of the number of inventors residing in a state is 0.11 for inventors who are from that state and 1.23 for inventors not from that state. Inventors who work for companies are particularly elastic to taxes.

And here are additional details about the micro findings.

…patenting is significantly negatively affected by personal income taxes. A one percentage point higher tax rate at the individual level decreases the likelihood of having a patent in the next 3 years by 0.63 percentage points. Similarly, the likelihood of having high quality patents with more than 10 citations decreases by 0.6 percentage points for every percentage point increase in the personal tax rate. …We find that a one percentage point increase in the personal tax rate leads to a 1.1 percent decline in the number of patents and a 1.4-1.7 percent decline in the number of citations, conditional on having any. …the likelihood of having a corporate patent also reacts very negatively to the personal tax rate… A one percentage point decrease in the corporate tax rate increases patents by 4% and citations by around 3.5%. The IV results are of similar magnitudes, but again even stronger. According to the IV specification, a one percentage point decrease in the corporate tax rate increases patents by 6% and citations by 5%.

Here are some of the conclusions from the study.

Taxation – in the form of both personal income taxes and corporate income taxes – matters for innovation along the intensive and extensive margins, and both at the micro and macro levels. Taxes affect the amount of innovation, the quality of innovation, and the location of inventive activity. The effects are economically large especially at the macro state-level, where cross-state spillovers and extensive margin location and entry decisions compound the micro, individual-level elasticities. …while our analysis focuses on the relationship between taxation and innovation, our data and approach have much broader implications. We find that taxes have important effects on intensive and extensive margin decisions, on the mobility of people and where inventors and firms choose to locate.

In other words, the bottom line is that tax rates should be as low as possible to produce as much prosperity as possible.

P.S. If you check the postscript of this column, you’ll see that there is also data showing how inventors respond to international tax policy. And there’s similar data for top-level entrepreneurs.

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The best budget rule in the United States is Colorado’s Taxpayer Bill of Rights. Known as TABOR, this provision in the state’s constitution says revenues can’t grow faster than population plus inflation. Any revenue greater than that amount must be returned to taxpayers.

Combined with the state’s requirement for a balanced budget, this means Colorado has a de facto spending cap (similar to what exists in Switzerland and Hong Kong).

The second-best budget rule is probably a requirement that tax increases can’t be imposed without a supermajority vote by the legislature.

The underlying theory is very simple. It won’t be easy for politicians to increase the burden of government spending if they can’t also raise taxes. Particularly since states generally have some form of rule requiring a balanced budget.

Basically a version of “Starve the Beast.”

Anyhow, according to the National Council of State Legislatures, 14 states have some type of supermajority requirements.

And more states are considering this reform.

Here are some excerpts from a column in the Washington Post.

Florida Republicans are pursuing a plan to make it harder for lawmakers to raise taxes in the state, adding new hurdles for Democrats hoping to enact bold social programs such as “Medicare for all” and more robust education spending. …Florida’s Republican lawmakers have approved a ballot measure that, if approved by the voters, would require a two-thirds “supermajority” of the legislature to enact any new taxes. …In…additional states — …Oregon and North Carolina — conservative lawmakers and business groups are currently advancing similar measures… The supermajority requirements have proved effective at keeping taxes low in the states where they have been implemented, said Joel Griffith of the American Legislative Exchange Council… “These supermajority rules make policymaking incredibly difficult,” said Elaine Maag, senior research associate at the Tax Policy Center, a nonpartisan think tank. “If a state can’t increase spending because of these very high bars for raising taxes, they can’t expand programs.”

Dean Stansel crunched the numbers in 1998 and got some encouraging data.

There is some evidence that supermajority requirements have at least helped to restrain the growth of taxes. From 1980 to 1996, state tax burdens as a share of personal income increased by 1.1 percent in states with supermajority requirements. Taxes rose five times faster in states without such requirements. In 10 states, residents face higher top personal income tax rates today than they did in 1990. None of those states require supermajority approval for tax hikes. None of the 13 supermajority states have higher top rates today than they did in 1990, and three of them have lowered their top rate in the 1990s.

Academic experts also have found positive effects.

In a 1990 study published in the William and Mary Law Review, Jim Miller and Mark Crain found some evidence of modest spending restraint.

Seven states require approval of tax proposals by a super-majority vote in the legislature. …According to this hypothesis, the amount of revenue available to politicians resembles a budget constraint, and when this constraint shifts, government spending consequently changes. …the tax-and-spend literature suggests a causal connection that should be controlled. This variable is expected to produce a negative coefficient because in making an increase in revenues more difficult, the requirement tightens the total constraint on spending options. …The super-majority required to increase taxes variable is negative, as expected, although it is significant at only the 10% level in the three models.

In a 2000 study published in the Journal of Public Economics, Brian Knight also determined that supermajority provisions limited taxation.

This paper measures the effect of state-level supermajority requirements for tax increases on tax rates. …A model is presented in which legislatures controlled by a pro-tax party adopt a supermajority requirement to reduce the majority party agenda control. The propensity of pro-tax states to adopt supermajority requirements results in an underestimate of the true effect of these requirements on taxes. To correct this identification problem, the paper first uses fixed effects to control for unobserved attitudes and then employs instruments that measure the difficulty of amending state constitutions. The paper concludes that supermajority requirements have significantly reduced taxes.

In a 2014 study published in State Politics & Policy Quarterly, Soomi Lee concluded that a supermajority has restrained the fiscal burden in California.

My article examines whether supermajority vote requirements (SMVR) to raise taxes in California’s constitution suppresses state tax burdens. The rationale behind the rule is to contain the growth of government by making it costly to form a winning coalition to raise taxes. …I take a different approach from extant literature and estimate the causal effect of SMVR by using synthetic control methods. The results show that, from 1979 to 2008, SMVR reduced the state nonproperty tax burden by an average of $1.44 per $100 of personal income, which is equivalent to 21% of the total tax burden for each year. The effect…has abated over time.

This last study is remarkable. The long-run fiscal outlook is quite grim in California, so just imagine how much worse it would be if the supermajority requirement didn’t exist.

I’ll close with this amateurish visual that I created.

Though the evidence from California shows the kitten shouldn’t be peacefully sleeping if there is a supermajority requirement.

The best way to think of such a provision is that it is akin to putting locks on your doors in a crime-ridden neighborhood. The crooks may figure out how to mug you on the street or break through your windows, so you’re still in danger.

But having locks on your doors is definitely better than not having them.

P.S. It’s not a fiscal rule, but the best tax policy for a state is to have a zero income tax. The second best rule is for a state to have a flat tax.

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New Jersey is a fiscal disaster area.

It’s in last place in the Tax Foundation’s index that measures a state’s business tax climate.

It’s tied for last place in the Mercatus Center’s ranking of state fiscal conditions.

And it ranks in the bottom-10 in measures of state economic freedom and measures of unfunded liabilities for bureaucrat pensions.

All of this led me, last October, to warn that the state was suffering from fiscal decay.

Then, two months ago, James Freeman of the Wall Street Journal wrote about how New Jersey’s uncompetitive fiscal system was encouraging highly productive taxpayers to leave the state.

The Garden State already has the third largest overall tax burden and the country’s highest property tax collections per capita. Now that federal reform has limited the deduction for state and local taxes, the price of government is surging again among high-income earners in New Jersey and other blue states. Taxpayers are searching for the exits. …says Jeffrey Sica, founder of Circle Squared, an alternative investments firm. “We structure real estate deals for family offices and high-net-worth individuals and at a record pace those family offices and individuals are leaving the TriState for lower-tax states. Probably a dozen this year at least,”…In the decade ending in 2016, real economic growth in New Jersey clocked in at a compound annual percentage rate of 0.1, just slightly higher than John Blutarsky’s GPA and less than a tenth of the national average for economic growth. The Tax Foundation ranks New Jersey dead last among the 50 states for its business tax climate. …Steven Malanga calls Mr. Murphy’s plan “the U-Haul Budget” for the new incentives it gives New Jersey residents to flee.

You would think that New Jersey politicians would try to stop the bleeding, particularly given the impact of federal tax reform.

But that assumes logic, common sense, and a willingness to put the interests of people above the interests of government. Unfortunately, all of those traits are in short supply in the Garden State, so instead the politicians decided to throw gasoline on the fire with another big tax hike.

The Wall Street Journal opines today on the new agreement from Trenton.

Governor Phil Murphy and State Senate leader Steve Sweeney have been fighting over whether to raise tax rates on individuals or businesses, and over the weekend they decided to raise taxes on both. Messrs. Murphy and Sweeney agreed to raise the state’s income tax on residents making more than $5 million to 10.75% from 8.97% and the corporate rate on companies with more than $1 million in income to 11.5% from 9%. This will give New Jersey the fourth highest marginal income tax rate on individuals and the second highest corporate rate after Iowa.

New Jersey is pursuing class warfare, but the politicians don’t seem to realize that the geese with the golden eggs can fly away.

The two Democrats claim this will do no harm because about 0.04% of New Jersey taxpayers will get smacked. But those taxpayers account for 12.5% of state income-tax revenue and their investment income is highly mobile. The state treasurer said in 2016 that a mere 100 filers pay more than 5.5% of all state receipts. Billionaire David Tepper escaped from New Jersey for Florida in 2015, and other hedge fund managers could follow. Between 2012 and 2016 a net $11.9 billion of income left New Jersey, according to the IRS. The flight risk will increase with the new limit of $10,000 on deducting state and local taxes on federal tax returns. …About two-thirds of New Jersey’s $3.5 billion income outflow last year went to Florida, which doesn’t have an income tax. …The fair question is why any rational person or business that can move would stay in New Jersey.

That’s not merely a fair question, it’s a description of what’s already happening. And it’s going to accelerate – in New Jersey and other uncompetitive states – when additional soak-the-rich schemes are imposed (unless politicians figure out a way to put fences and guard towers at the border).

A few months ago, I conducted a poll on which state would be the first to suffer a fiscal collapse. For understandable reasons, Illinois was the easy “winner.” But I won’t be surprised if there are a bunch of new votes for New Jersey. Simply stated, the state is committing fiscal suicide.

P.S. What’s amazing (and depressing) is that New Jersey was like New Hampshire as recently as the 1960s, with no state sales tax and no state income tax.

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A balanced budget requirement is neither necessary nor sufficient for good fiscal policy.

If you want proof for that assertion, check out states such as IllinoisCalifornia, and New Jersey. They all have provisions to limit red ink, yet there is more spending (and more debt) every year. There are also anti-deficit rules in nations such as GreeceFrance, and Italy, and those countries are not exactly paragons of fiscal discipline.

The real gold standard for good fiscal policy is my Golden Rule. And the best way to make sure government doesn’t grow faster than the private sector is to have a constitutional rule limiting the growth of government.

That’s why I’m a big fan of the “debt brake” in Switzerland’s constitution and Article 107 in Hong Kong’s constitution.

And it’s also why the 49 other states, assuming they want an effective fiscal rule, should look at Colorado’s Taxpayer Bill of Rights (TABOR) as a role model.

Colorado’s Independence Institute has a very informative study on how TABOR works and the degree to which it has been effective. Here’s a good description of the system.

Colorado voters adopted The Taxpayer’s Bill of Rights in 1992. TABOR allows government spending to grow each year at the rate of inflation-plus-population. Government can increase faster whenever voters consent. Likewise, tax rates can be increased whenever voters consent. …The Taxpayer’s Bill of Rights requires that excess government revenues be refunded to taxpayers, unless taxpayers vote to let the government keep the revenue.

And here are the headline results.

Cumulatively, TABOR refunds have been over $800 per Coloradan, or $3,200 for a family of four. …If Colorado government had continued growing at the same high rate (8.56% compound annual rate) as in 1983-92, the average Coloradan would have paid an additional $442 taxes in 2012. The cumulative two-decade savings per Coloradan are $6,173—or more than $24,000 for a family of four.

However, the study notes that TABOR was most effective during its first 10 years. It was less effective in its second decade because voters acquiesced to a “TABOR time-out” as part of referendum C in 2005.

The final decade included the largest tax increase in Colorado history, enacted as Referendum C in 2005. Decade-2 was also marked by increasing efforts to evade TABOR by defining nearly 60% of the state budget as “exempt” from TABOR. …Rapid government growth resumed in Decade-2, mainly because of Referendum C.

This chart from the study shows that outcomes were much better during the first decade of TABOR.

But a weakened TABOR is better than nothing. Here’s the conclusion of the report.

The Taxpayer’s Bill of Rights Amendment has worked well to achieve its stated intention to “slow government growth.” Although government has still continued to grow significantly faster than the rate of population-plus-inflation, the Taxpayer’s Bill of Rights did partially dampen excess government growth. …In terms of economic vitality, Colorado’s Decade-1 was best for Colorado. Unlike in the pre-TABOR decade, or in TABOR Decade-2 with its record increase in taxes and spending, because of Referendum C. Colorado’s first TABOR decade saw the state economy far outperform the national economy.

But keep in mind that the economic gains occurred in the first decade.

The bottom line is that spending caps are like speed limits in school zones. If they’re set too high, that defeats the purpose.

And in Colorado, the vote for Referendum C allowed a spending surge that made a mockery of TABOR.

But only temporarily, which is why that period was known as the “TABOR time-out.” The rules once again limit spending growth to population plus inflation.

For instance, TABOR made it difficult for state politicians to spend the additional tax revenues produced by marijuana legalization.

Needless to say, the political crowd hates having their hands tied. Which is why the pro-spending lobbies are agitating to once again gut TABOR. Here’s a clip from a local news report that does a good job of describing the current fight.

The battle actually started a couple of years ago. Here are some excerpts from a 2016 report by the Associated Press.

By 2030, Colorado’s population will grow from 5 million to 7 million people, thanks in part to a strong and diverse economy, the state’s famed Rocky Mountain quality of life, and its constitutionally-mandated low taxes. …The state’s Democratic governor, John Hickenlooper, is trying to find ways to squeeze more revenue for roads from the budget, while Republicans don’t want to tamper with the fabled 1992 constitutional amendment known as TABOR that keeps a tight limit on those taxes. …Under TABOR, voters must approve any state and local tax hike. Democrats are still stung by a resounding defeat of a 2013 ballot initiative to raise $1 billion for schools.

I’m amused by the fact that the above passage starts by noting the state has a “strong” economy. Too bad the reporter didn’t put 2 and 2 together and recognize that TABOR deserves some of the credit.

Likewise, this next passage cites a leftist who acknowledges growth in the state, but pretends that it’s exogenous, like the weather.

Liberals think that’s a recipe for disaster, especially in a growing state. “What we have to stop doing is pitting necessary priorities like roads against other necessary priorities like schools and colleges,” said Tim Hoover, spokesman for the Colorado Fiscal Institute, which favors dismantling the amendment. “TABOR forces us to do that.” So far the low-tax crowd is winning. Even Hickenlooper acknowledges there isn’t a popular appetite to raise taxes, and his hopes of changing the classification of an arcane fee in the budget to free up revenue are opposed by Republicans… Republicans say the real problem is growing Medicaid spending. Colorado, which expanded the program under the Affordable Care Act, is spending about $2.5 billion on the health care plan.

Note that TABOR critics object to various interest groups having to compete for money.

But that’s exactly why a spending limit is so desirable. Politicians are forced to abide by the rules that apply to every household and business in the state. In other words, they have to (gasp!) prioritize.

Let’s conclude by reviewing some passages from a pro-TABOR column published last week in the Steamboat newspaper.

Colorado’s  has grown by nearly two-thirds since 1992, one of the fastest increases in the country. If you are part of the more than two million new residents who have arrived over this time, there are a few things you should know…the Taxpayer’s Bill of Rights is responsible for much of the state’s economic success, which likely drew you here in the first place. Between 1992 and 2016, median household income in Colorado grew by 30 percent, adjusted for inflation. …TABOR helped end years of economic stagnation and laid the groundwork for the state’s future success by keeping resources in the hands of Colorado residents who could put them to their highest valued use and checking overzealous government spending. …Its requirement that excess revenues must be refunded to taxpayers has also resulted in more than $2 billion being returned to the private economy… TABOR has empowered voters to reject roughly a dozen advocacy-backed tax hike proposals.

My favorite part is when they cite critics, who confirm that TABOR is successful.

Denver Post editorial last year complained, “TABOR’s powerful check on government spending in reality has been a padlock on the purse-strings of the General Assembly.” The check on spending is exactly the point, and it still allows spending to grow in-line with inflation and population growth. If government wants more money, all it has to do is ask. Requiring consent is hardly a “padlock.”

Amen. We could use some more padlocks in the rest of the country. TABOR should be nationally emulated, not locally emasculated.

P.S. Enjoy this amusing video from the Independence Institute. It shows politicians in a group therapy session about TABOR.

P.P.S. By the way, there is a spending cap in Washington, though it only applies to a small portion of the budget (appropriated outlays). Sadly, that very modest example of fiscal restraint has not been very effective. The group therapy session in Washington, otherwise known as Congress, voted to bust those spending caps in 2013, 2015, and earlier this year. Sort of D.C.’s lather-rinse-repeat version of Referendum C.

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Even though I wrote about proposed tax increases in Illinois just 10 days ago, it’s time to revisit the issue because the Tax Foundation just published a very informative article about the state’s self-destructive fiscal policy.

It starts by noting that the aggregate tax burden is higher in Illinois than it is in adjoining states.

Just what are Illinois’ neighbors doing on taxes? They’re taxing less, for starters. In Illinois, state and local taxes account for 9.3 percent of state income. The state and local taxes in Illinois’ six neighboring states account, in aggregate, for 8.0 percent of the income of those states.

Here’s the table showing the gap between Illinois and its neighbors. And it’s probably worth noting that the tax gap is the largest with the two states – Indiana and Missouri – that have the longest borders with Illinois.

While the aggregate tax burden is an important measure, I’ve explained before that it’s also important to focus on marginal tax rates. After all, that’s the variable that determines incentives for productive behavior since it measures how much the government confiscates when investors and entrepreneurs generate additional wealth.

And this brings us to the most important point in the article. Illinois politicians want to move in the wrong direction on marginal tax rates while neighboring jurisdictions are moving in the right direction.

Except for Iowa, all of Illinois’ neighbors have cut their income taxes since Illinois adopted its “temporary” income tax increases in 2011—and Iowa is on the verge of adopting a tax reform package that cuts individual income tax rates… Over the same period, Illinois’ single-rate income tax was temporarily raised from 3 to 5 percent, then allowed to partially sunset to 3.75 percent before being raised to the current 4.95 percent rate. A 1.5 percent surtax on pass-through business income brings the rate on many small businesses to 6.45 percent. Now there are calls to amend the state constitution to allow graduated-rate income taxes, with proposals circulating to create a top marginal rate as high as 9.85 percent (11.35 percent on pass-through businesses).

Here’s the chart showing the top rate in various states in 2011, the top rates today, and where top tax rates could be in the near future.

What’s especially remarkable is that Illinois politicians are poised to jack up tax rates just as federal tax reform has significantly reduced the deduction for state and local taxes.

For all intents and purposes, they’re trying to drive job creators out of the state (a shift that already has been happening, but now will accelerate).

Normally, when I write that a jurisdiction is committing fiscal suicide, I try to explain that it’s a slow-motion process. Illinois, however, could be taking the express lane. No wonder readers overwhelmingly picked the Land of Lincoln when asked which state will be the first to suffer a fiscal collapse.

P.S. Illinois politicians claim they want to bust the flat tax so they can impose higher taxes on the (supposedly) evil rich. High-income taxpayers doubtlessly will be the first on the chopping block, but I can say with 99.99 percent certainty that class-warfare tax increases will be a precursor to higher taxes on everybody.

P.P.S. Illinois residents should move to states with no income taxes. But if they only want to cross one border, Indiana would be a very good choice. And Kentucky just shifted to a flat tax, so that’s another potential option.

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When I did a poll earlier this year, asking which state would be the first to suffer a fiscal crisis, I wasn’t terribly surprised that Illinois wound up in first place.

But I was surprised by the margin. Even though there’s a good case to be made for basket-case jurisdictions such as New Jersey, California, and Connecticut, Illinois not only got a plurality of votes, it received an absolute majority.

Based on what’s happening in the Land of Lincoln, it appears that state politicians want to receive a supermajority of votes. There’s pressure for ever-higher taxes to finance an ever-more-bloated bureaucracy.

And taxpayers are voting with their feet.

The Wall Street Journal editorialized about the consequences of the state’s self-destructive fiscal policy.

Democrats in Illinois ought to be especially chastened by new IRS data showing an acceleration of out-migration. The Prairie State lost a record $4.75 billion in adjusted gross income to other states in the 2015 tax year, according to recently IRS data released. That’s up from $3.4 billion in the prior year. …Florida with zero income tax was the top destination for Illinois expatriates… What’s the matter with Illinois? Too much for us to distill in one editorial, but suffice to say that exorbitant property and business taxes have retarded economic growth. …Taxes may increase as Democrats scrounge for cash to pay for pensions. …Illinois’s unfunded pension liabilities equalled 22.8% of residents’ personal income last year, compared to a median of 3.1% across all states and 1% in Florida. …Illinois’s economy has been stagnant, growing a meager 0.9% on an inflation-adjusted annual basis since 2012—the slowest in the Great Lakes and half as fast as the U.S. overall. This year nearly 100,000 individuals have left the Illinois labor force.

Here’s a chart showing a very depressing decline in the state’s labor force.

By the way, I wonder whether the chart would look even worse if government bureaucrats weren’t included.

The Chicago Tribune has a grim editorial about what’s happening.

From millennials to retirees, …Illinois is losing its promise as a land of opportunity. Government debt and dysfunction contribute to a weak housing market and a stagnant jobs climate. State and local governments face enormous pension and other obligations. Taxes have risen sharply; many Illinois politicians say they must rise more. People are fleeing. Last year’s net loss: 33,703.

In an editorial for the Chicago Tribune, Kristen McQueary correctly worries about the trend.

It’s one thing to harbor natural skepticism toward government. It’s quite another to take the dramatic step of moving your family, your home, your livelihood to another state to escape it. But it’s happening. The naysayers and deniers blame the weather. They eye-roll the U-Haul rebellion. They downplay the dysfunction. Good riddance to those stingy taxpayers, they trumpet. But that is a shallow, ignorant and elitist viewpoint that dismisses the thoughtful and wrenching decisions thousands of once-devoted Illinoisans have made. For four years in a row, Illinois has lost population in alarming numbers. In 2017, Illinois lost a net 33,703 residents, the largest numerical population decline of any state. That’s the size of St. Charles or Woodridge or Galesburg. Wiped off the map. In one year. …Policy choices have consequences. …People are fleeing Illinois. And still, Democratic leaders in Chicago and Cook County, and their supporters, generally deny that high taxes, underfunded pensions, government debt and political dysfunction are the reasons for the exodus — or that it’s acute.

Newspapers in other states have noticed, as evinced by this editorial from the Las Vegas Review-Journal.

When the progressive political class preaches equality and prosperity, but bleeds productive citizens dry by treating them as little more than human ATMs, there should be little surprise when those same citizens take themselves (and their green) to greener pastures. Perhaps no state in the nation is seeing a bigger such exodus than Illinois. …On the flip side, all of the states surrounding Illinois saw their populations increase… Illinois is experiencing a self-inflicted storm of fiscal distress. …While state income taxes in Illinois don’t reach they level impose in states such as New York and California, that’s not for a lack of trying. The state raised its rate by 32 percent over the summer, and Democrats want to even more progressive tax rates to pay for all the goodies they’ve promised to Big Labor in order to grease their re-elections. …Illinois is a financial basket case — which is what you get when you combine political patronage with powerful public-sector unions that control leftist politicians. The state should be a case study for other jurisdictions on how not to conduct public policy. After all, who will pay the bills when the taxpayers flee?

Steve Chapman, in a column for Reason, expects more bad news for Illinois because of pressure for higher taxes.

With the biggest public pension obligations, the slowest personal income growth, and the biggest population loss of any state, it has consistently recorded achievements that are envied by none but educational to all. The state is in the midst of a debilitating fiscal and economic crisis. …Illinois has endured two income tax increases in the past seven years. In 2011, the flat rate on individual income jumped from 3 percent to 5 percent. In 2015, under the original terms, it fell to 3.75 percent—a “cut” that left the rate 25 percent above what it was in 2010. Then last year, over Gov. Bruce Rauner’s veto, the legislature raised the rate to 4.95 percent. None of these changes has ended the state’s economic drought, and it’s reasonable to assume they actually made it drier. …well-paid people can’t generally leave the country to find lower tax rates. They can leave one state for another, and they do. …A 2016 poll by the Paul Simon Public Policy Institute at Southern Illinois University found that nearly half of residents would like to leave the state—and that “taxes are the single biggest reason people want to leave.”

The Wall Street Journal opined on the state’s slow-motion suicide.

The only…restraint…on public union governance in Illinois…the state’s flat income tax. …Democrats in Springfield have filed three constitutional amendments to establish a graduated income tax… Democrats are looking for more revenue to finance ballooning pension costs, which consume about a quarter of state spending. …Connecticut and New Jersey provide cautionary examples. Democrats in both states have soaked their rich time and again, and the predictable result is that both states have fewer rich to soak. Economic growth slowed and revenues faltered. This vicious cycle is already playing out in Illinois amid increasing property, income and business taxes. Over the last four years, Illinois GDP has risen a mere 0.9% per year, half the national average and the slowest in the Great Lakes region. Between 2012 and 2016, Illinois lost $18.35 billion in adjusted gross income to other states. …Democrats claim a progressive income tax will spare the middle-class, but sooner or later they’ll be the targets too because there won’t be enough rich to finance the inexorable demands of public unions. …Once voters approve a progressive tax, Democrats can ratchet up rates as their union lords dictate.

While a bloated and over-compensated bureaucracy (especially unfunded promises for lavish retiree benefits) is the top fiscal drain, the state also loves squandering money in other ways.

Here are some excerpts from a piece in the Belleville News-Democrat.

Illinois is the dependency capital of the Midwest. No other state in the region has more of its population dependent on food stamps… So what’s driving the state’s dependency crisis? State bureaucrats using loopholes and gimmicks to keep more people dependent on welfare. According to the Illinois Department of Human Services, nearly 175,000 able-bodied childless adults are on the program. These are adults in their prime working years — between the ages of 18 and 49 — with no dependent children and no disabilities keeping them from meaningful employment. …the state has relied upon loopholes and gimmicks to trap more and more able-bodied adults in dependency. Federal law allows states to seek temporary waivers of the work requirement in areas with unemployment rates above 10 percent or with a demonstrated lack of job opportunities in the region. …the Illinois Department of Human Services…used old data and it gerrymandered the request in whatever way was necessary to keep more able-bodied adults on welfare. …State bureaucrats have gamed the system and as a result, thousands of able-bodied adults will remain trapped in dependency, with little hope of better lives.

Let’s close with some excerpts from a very depressing column in the Chicago Tribune by Diana Sroka Rickert.

…this is a state government that has been broken for decades. It is designed to reject improvement in every form, at every level. …The Thompson Center…is a near-perfect representation of state government. It is gross, rundown, and nobody cares. …there is a disturbing sense of entitlement among some state employees. …Underperformers aren’t fired; they’re simply transferred to different positions, shuffled elsewhere on the payroll or tucked away at state agencies. …this is a state government that is ranked last by almost every objective and measurable standard. A state government that fails every single one of its residents, day after day — and has failed its residents for decades. A state government that demands more and more money each year, to deliver increasingly less value.

Keep in mind, incidentally, that all this bad news will almost certainly become worse news thanks to last year’s tax reform. Restricting the state and local tax deduction means a much smaller implicit federal subsidy for high-tax states.

P.S. If you want good news on state tax policy, South Dakota may have the nation’s best system. And North Carolina arguably has taken the biggest step in the right direction. Kentucky, meanwhile, has just switched to a flat tax.

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California is a lot like France. They’re both wonderful places to visit.

And they’re both great places to live if you already have a lot of money.

But neither jurisdiction is very friendly to people who want to get rich. And, thanks to tax competition, that’s having a meaningful impact on migration patterns.

I’ve previously written about the exodus of successful and/or aspirational people from France.

Today we’re going to examine the same process inside the United States.

It’s a process that is about to get more intense thanks to federal tax reform, as Art Laffer and Steve Moore explain in a column for the Wall Street Journal.

In the years to come, millions of people, thousands of businesses, and tens of billions of dollars of net income will flee high-tax blue states for low-tax red states. This migration has been happening for years. But the Trump tax bill’s cap on the deduction for state and local taxes, or SALT, will accelerate the pace. …Consider what this means if you’re a high-income earner in Silicon Valley or Hollywood. The top tax rate that you actually pay just jumped from about 8.5% to 13%. Similar figures hold if you live in Manhattan, once New York City’s income tax is factored in. If you earn $10 million or more, your taxes might increase a whopping 50%. …high earners in places with hefty income taxes—not just California and New York, but also Minnesota and New Jersey—will bear more of the true cost of their state government. Also in big trouble are Connecticut and Illinois, where the overall state and local tax burden (especially property taxes) is so onerous that high-income residents will feel the burn now that they can’t deduct these costs on their federal returns. On the other side are nine states—including Florida, Nevada, Texas and Washington—that impose no tax at all on earned income.

Art and Steve put together projections on what this will mean.

Over the past decade, about 3.5 million Americans on net have relocated from the highest-tax states to the lowest-tax ones. …Our analysis of IRS data on tax returns shows that in the past three years alone, Texas and Florida have gained a net $50 billion in income and purchasing power from other states, while California and New York have surrendered a net $23 billion. Now that the SALT subsidy is gone, how bad will it get for high-tax blue states? Very bad. We estimate, based on the historical relationship between tax rates and migration patterns, that both California and New York will lose on net about 800,000 residents over the next three years—roughly twice the number that left from 2014-16. Our calculations suggest that Connecticut, New Jersey and Minnesota combined will hemorrhage another roughly 500,000 people in the same period. …the exodus could puncture large and unexpected holes in blue-state budgets. Lawmakers in Hartford and Trenton have gotten a small taste of this in recent years as billionaire financiers have flown the coop and relocated to Florida. …Progressives should do the math: A 13% tax rate generates zero revenue from someone who leaves the state for friendlier climes.

I don’t know if their estimate is too high or too low, but there’s no question that they are correct about the direction of migration.

And every time a net taxpayer moves out, that further erodes the fiscal position of the high-tax states. Which is why I think one of the interesting questions is which state will be the first to suffer fiscal collapse.

In large part, taxpayers are making a rational cost-benefit analysis. Some states have dramatically increased the burden of government spending. Yet does anyone think that those states are providing better services than states with smaller public sectors? Or that those services are worth all the taxes they have to pay?

Consider, for instance, the difference between New York and Tennessee.

New York spends nearly twice as much on state and local government per person ($16,000) as does economically booming Tennessee ($9,000).

Anyhow, I’m guessing the new restriction on the state and local tax deduction is going to change the behavior of state politicians. At least I hope so.

But nobody ever said politicians were sensible. Ross Marchand of the Taxpayers Protection Alliance explains that Massachusetts and New Jersey are still thinking about more class-warfare taxation.

Massachusetts and New Jersey are currently considering “millionaires’ taxes,” which would significantly increase top rates and spark a “race to the top” for revenue… Instead of helping out the middle class, a millionaires’ tax will result in an exodus from the state, squeezing out opportunities for working Americans. …Prominent millionaires respond to these proposals by threatening to leave, and research shows that the well-to-do regularly follow through on these promises.  …nearly all of the migration that does happen in top brackets has to do with tax changes. Researchers at Stanford University and the Treasury Department estimate that a 10 percent increase in taxes causes a 1 percent bump in migration, assuming no change in any other policy. …If New Jersey and Massachusetts approve new millionaires’ taxes, it is difficult to predict how much will be raised and where these funds will ultimately wind up. But if New York and California are any guide, income surtaxes will be destructive. When it comes to higher taxation, interstate migration is just the tip of the iceberg. Higher-tax states, for instance, see less innovative activity and scientific research according to an analysis by economists at the Federal Reserve and UC Berkeley.

My suggestion is that politicians in Massachusetts and New Jersey should look at what’s happening to California.

CNBC reports on the growing exodus from the Golden State.

Californians may still love the beautiful weather and beaches, but more and more they are fed up with the high housing costs and taxes and deciding to flee to lower-cost states such as Nevada, Arizona and Texas. …said Dave Senser, who lives on a fixed income near San Luis Obispo, California, and now plans to move to Las Vegas. “Rents here are crazy, if you can find a place, and they’re going to tax us to death. That’s what it feels like. At least in Nevada they don’t have a state income tax. And every little bit helps.” …Data from United Van Lines show some of the most popular moving destinations for Californians from 2015 to 2017 were Texas, Arizona, Oregon, Washington and Colorado. Other experts also said Nevada remains a top destination. …Internal Revenue Service data would appear to show that the middle-class and middle-age residents are the ones leaving, according to Joel Kotkin, a presidential fellow in Urban Futures at Chapman University in Orange, California. …Furthermore, Kotkin believes the outmigration from California may start to rise among higher-income people, given that the GOP’s federal tax overhaul will result in certain California taxpayers losing from the state and local tax deduction cap.

The Legislative Analyst’s Office for the California legislature has warned the state’s lawmakers about this trend.

For many years, more people have been leaving California for other states than have been moving here. According to data from the American Community Survey, from 2007 to 2016, about 5 million people moved to California from other states, while about 6 million left California. On net, the state lost 1 million residents to domestic migration—about 2.5 percent of its total population. …Although California generally has been losing residents to the rest of the country, movement between California and some states deviates from this pattern. The figure below shows net migration between California and individual states between 2007 and 2016. California gained, on net, residents from about one-third of states, led by New York, Illinois, and New Jersey.

Here’s the chart showing where Californians are moving. Unsurprisingly, Texas is the main destination.

By the way, state-to-state migration isn’t solely a function of income taxes.

A Market Watch column looks at the impact of property taxes on migration patterns.

Harty’s clients range from first-time buyers with sticker shock to people who’ve lived in and around Chicago all their lives. Each has a different story, but they share a common theme: many believe that Chicago-area property taxes are too high, and relief is just an hour away over the state line. …if all real estate is local, all real estate taxes may be even more so. …Attom’s data show that the average tax burden ranges from $10,612 in the most expensive metro area, Bridgeport-Stamford-Norwalk, Connecticut, to $525 in Montgomery, Alabama. And those are just averages. …taxes are “the icing on the cake” in areas that are seeing strong population inflows… Among the counties that saw the biggest percentage of in-migration in 2017, according to Census data, all are in Texas, Florida, Georgia, or the Carolinas. (Texas doesn’t have particularly low property taxes, but it has no personal income tax, making the overall tax burden much more manageable.) Cook County, where Chicago is located, had the biggest number of people leaving… Blomquist’s analysis of Census data showed that among all counties that had at least a 1% population increase, the average tax bill was $2,706, while in all counties with a least a 1% decline in population, the average was $3,900.

The key sentence in that excerpt is the part about Texas having relatively high property taxes, but making up for that by having no state income tax.

The same thing is true about New Hampshire.

But just imagine what it must be like to live in a state with high income taxes and high property taxes. If this map is any indication, places such as New York and Illinois are particularly awful for taxpayers.

Let’s close with a big-picture look at factors that drive state competitiveness.

Mark Perry takes an up-close look at the characteristics of the five states with the most in-migration and out-migration.

…four of the top five outbound states (Illinois ranked No. 46, Connecticut at No. 49, New Jersey at No. 48, and California at No. 47) were among the five US states with the highest tax burden — New York was No. 50 (highest tax burden). The average tax burden of the top five outbound states was 11.2%, with an average rank of 43.2 out of 50. In contrast, the top five inbound states have an average tax burden of 8.7% and an average rank of 16.6 out of 50. As would be expected, Americans are leaving states with some of the country’s highest overall tax burdens (IL, CT, CA and NJ) and moving to states with lower tax burdens (TN, SC and AZ). …that there are significant differences between the top five inbound and top five outbound US states when they are compared on a variety of measures of economic performance, business climate, tax burdens for businesses and individuals, fiscal health, and labor market dynamism. There is empirical evidence that Americans do “vote with their feet” when they relocate from one state to another, and the evidence suggests that Americans are moving from states that are relatively more economically stagnant, Democratic-controlled fiscally unhealthy states with higher tax burdens, more regulations and with fewer economic and job opportunities to Republican-controlled, fiscally sound states that are relatively more economically vibrant, dynamic and business-friendly, with lower tax and regulatory burdens and more economic and job opportunities.

Here’s Mark’s table, based on 2017 migration data.

As Mark said, people do “vote with their feet” for smaller government.

Which is one of the reasons I’m a big fan of federalism. When there’s decentralization, people can escape bad policy. And that helps to discipline profligate governments.

P.S. I’m writing today’s column from Switzerland, which is a very successful example of genuine federalism.

P.P.S. Americans are free to move from one state to another, and the uncompetitive states can’t stop the process. Unfortunately, the IRS has laws that penalize people who want to move to other nations. In this regard, the U.S. is worse than France.

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On April 17, the Supreme Court heard oral arguments in South Dakota v. Wayfair, Inc., a case dealing with whether states should have the power to levy taxes on companies in other states.

Most observers see this issue as a fight over taxing the Internet, taxing online sales, or a battle between Main Street merchants and Silicon Valley tech firms. Those are all parts of the story, but I’ve explained that this also is a contest between two competing approaches to taxation.

On one side are pro-market people who favor origin-based taxation, which is based on the notion that sales should be taxed where the merchant is based.

On the other side are pro-government people who want destination-based taxation, which is based on the notion that sales should be taxed where the consumer lives.

Needless to say, I’m not on the pro-government side of the battle. Here’s some of what I wrote when I was at the Heritage Foundation way back in 2001.

Requests to establish this destination-based tax authority should be denied. Such a regime would create an anti-consumer sales tax cartel for the benefit of profligate governments. It also would undermine privacy by requiring the collection of data on individual purchases. And it would violate important constitutional principles by giving state and local governments the power to impose their own taxes on businesses in other states.

All of that is still true today, but let’s look at some more recent analysis of the issue, all of which is tied to last week’s hearing at the Supreme Court.

George Will opines on South Dakota’s revenue grab for the Washington Post.

South Dakota has enacted a law contradicting a 26-year-old court decision concerning interstate commerce, and a law Congress passed and extended 10 times. It wants to tax purchases that are made online from vendors that have no physical presence in the state. South Dakota wants to increase its revenue and mollify its Main Street merchants. …In 1992, in the Internet’s infancy, the court held that retailers are required to collect a state’s sales taxes only when the retailers have a “substantial nexus” — basically, a physical, brick-and-mortar presence — in the state where the item sold is purchased. Such a nexus would mean that the retailer benefits from, and should pay for, local government services. Absent such a nexus, however, states’ taxation of sales would violate the Constitution, which vests in Congress alone the power to impose such burdens on interstate commerce. …Internet commerce…could not have flourished if vendors bore the burden of deciphering and complying with the tax policies of 12,000 state and local taxing jurisdictions, with different goods exempted from taxation. …the Internet Tax Freedom Act…is intended to shield small Internet sellers from discriminatory taxes and compliance burdens. …South Dakota is seeking the court’s permission for its extraterritorial grasping. …Governments often are reflexively reactionary when new technologies discomfort established interests with which the political class has comfortable relations of mutual support. The state’s sales-tax revenue has grown faster than the state’s economy even as Internet retailing has grown. …Traditional retailing will…prosper or not depending on market forces, meaning Americans’ preferences. State governments should not try to prevent this wholesome churning from going where it will.

The Wall Street Journal also has opined in favor of limits on the ability of states to impose their laws outside their borders.

The Supreme Court’s landmark 1992 Quill decision protects small businesses across the country from tax-grubbing politicians across the country. …At issue in South Dakota v. Wayfair is whether governments can tax and regulate remote retailers that don’t enjoy the state’s representation or benefit from its public services. …Fast forward 25 years. States complain that online commerce is eroding their tax base. Brick-and-mortar stores grouse that remote retailers are dodging taxes, putting them at a competitive disadvantage. …Politicians would prefer to soak out-of-state retailers rather than their own taxpayers. But America’s founders devised the Commerce Clause to prevent states from burdening interstate commerce and making long-arm tax grabs.

Here’s a troubling tidbit from the WSJ editorial. The Trump Administration is siding with South Dakota politicians, using the same statist rationale as the European politicians who are trying to grab more money from high-tech American companies.

The Justice Department has filed a brief supporting South Dakota… Seriously? According to Justice, businesses that operate a website have a “virtual” presence everywhere. The European Commission has invoked the same argument to impose a digital tax on Silicon Valley tech giants, which the Trump Administration has denounced as an extraterritorial tax grab.

Wow, the incompetence is staggering. The Stupid Party strikes again.

Veronique de Rugy explains in her Reason column that state governments want to overturn Quill because they don’t want tax competition.

If you think internet companies aren’t paying any taxes for online sales and that’s killing bricks-and-mortar retailers and states’ budgets, you, my friend, have been duped. Nothing could be further from the truth. …Most state lawmakers want to see Quill overturned, allowing them to force out-of-state companies to collect sales taxes on their behalf. This argument was just heard by the Supreme Court If the states were to win, they would be able to reach into the pockets of that mom selling her paintings on Etsy, even though she may live on the other side of the country, didn’t elect other states’ officials, and never agreed to those states’ tax laws. …tax competition among states would also be lost if Quill were overturned. Under the new regime, online consumers—no matter where they shop or what they buy—would lose the ability to shop around for a better tax system. Without the competitive pressure and the fear of losing consumers to lower-tax states, lawmakers would not feel the need to try to rein in their sales tax burden. It’s that pressure, which limits their tax grabbing abilities, that these lawmakers resent and want the Supreme Court to put an end to. …There is a lot to be lost in the Wayfair case. If Quill were to be overturned, compliance costs could skyrocket for many retailers, and good principles of taxation would be thrown out the window. Healthy tax competition is at stake. Let’s hope the highest court in the land makes the right decision.

In a column for the Wall Street Journal, Chris Cox, former Congressman and former Chairman of the Securities and Exchange Commission, debunks the notion that states are suffering for a loss of tax revenue.

‘Our states are losing massive sales-tax revenues that we need for education, health care, and infrastructure,” South Dakota’s Attorney General Marty Jackley told the U.S. Supreme Court… His state’s Supreme Court opined that sales tax revenues have “declined.” The state Legislature, citing its own “finding” to this effect, enacted a law requiring out-of-state retailers to collect sales tax on purchases shipped to South Dakota.

Here’s the data debunking Jackley’s claim about South Dakota “losing massive sales-tax revenues.”

…the law is based on a false premise. The state’s own data show that sales and use tax revenue grew from $787.7 million in 2013 to $974.7 in 2017—considerably faster than the state’s rate of economic growth. The governor’s budget for 2018 projects the state’s sales and use tax revenue will be more than $1 billion, 4% higher than last year, with no change in rate. That’s 29% higher than five years earlier. Sales-tax revenues have been booming in other states, too.

In other words, politicians are greedy and they’re willing to prevaricate. They want more and more revenue and they don’t want to face competitive pressure that might limit their ability to extract more money that can be used to buy votes.

Is anyone shocked?

P.S. The fight between “origin-based” and “destination-based” approaches to consumption taxation is very analogous to the fight between “territorial” and “worldwide” approaches to income taxation.

P.P.S. Given that it arguably has the best (or least-destructive) tax system of any state, it’s disappointing to see South Dakota politicians taking a lead role in an effort that would undermine tax competition.

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The best policy for a state (assuming it wants growth and competitiveness) is to have no income tax. Along with a modest burden of government spending, of course.

The next-best approach is for a state to have a flat tax. If nothing else, a flat tax inevitably will have a reasonable rate since it’s politically difficult to pillage everyone (though Illinois is trying very hard to be an exception to that rule).

Moreover, a flat tax also sends a signal that politicians in the state don’t (or can’t) play the divide-and-conquer game of periodically raising taxes on different income groups.

Today, we have some good news. Kentucky has ditched its so-called progressive income tax and joined the flat tax club. The Tax Foundation has the details (including the changes in the state’s ranking).

…legislators in Kentucky overrode Governor Matt Bevin’s veto to pass HB 366, a tax reform package, in the last few days of the session. Ultimately, HB 366…increases Kentucky’s ranking on the State Business Tax Climate Index from 33rd to 18th. …Here’s how HB 366 changes Kentucky’s tax code: Replacing the current six-bracket individual income tax, which has a top rate of 6.0 percent, with a 5 percent single rate individual income tax; …Replacing the current three-bracket corporate income tax, with its top rate of 6.0 percent, with a 5 percent flat rate; …Expanding the sales tax base to include select services…; and Raising the cigarette tax from 60 cents to $1.10 per pack. …the changes in this tax reform package dramatically improve the state’s tax climate. By broadening bases while lowering rates, starting to correct the inequities in the sales tax base, and taking steps to make the state more friendly to investment, policymakers in the state took a responsible approach to comprehensive tax reform.

Kentucky will have a better tax system, but there is a dark lining to the silver cloud of reform.

The legislation is a net tax increase, meaning state politicians will have more money to spend (which is a variable that is not included in the Tax Foundation’s Business Tax Climate Index).

As a big fan of the no-tax-hike pledge, that makes me sympathetic to some of those who opposed the legislation.

But I confess that I’m nonetheless happy that there’s now another state with a flat tax.

Which motivated me to create a five-column ranking for states with regards to the issue of personal income tax.

The best states are in the first column, since they don’t impose any income tax. The second-best option is a flat tax, and then I have three options for so-called progressive tax regimes. A “low-rate” state means the top bracket is less than 5 percent and a “class-warfare” state means the top bracket is higher than 8 percent (with other states in a middle group).

Kentucky has moved from the fourth column to the second column, which is a nice step. Very similar to what North Carolina did a few years ago.

Kansas, by contrast, recently went from the fourth column to the third column and then back to the fourth column.

And I may have to create a special sixth column for states such as California.

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Back in 2013, I shared a poll to see who people would pick as their “favorite political cartoonist.” Michael Ramirez currently has the lead, which doesn’t surprise me when you look at options (here, here, here, and here) I provided.

But if there was a prize for the most depressingly accurate political cartoon, he also would win the prize for his depiction of what happens when state and local politicians “negotiate” compensation packages for bureaucrats.

Simply stated, politicians have a giant incentive to provide lavish benefits to interest groups that then recycle some of the loot back to elected officials in the form of campaign contributions.

But the real key to the scam is that the bill gets imposed on future generations.

The American Legislative Exchange Council has a must-read report on the giant funding gaps that this has produced in the pension plans for state and local government bureaucrats.

If net pension assets are determined using more realistic investment return assumptions, pension funding gaps are much wider than even the large sums reported in state financial documents. Unfunded liabilities (using a risk-free rate of return assumption) of state-administered pension plans now exceed $6 trillion—an increase of $433 billion since our 2016 report. The national average funding ratio is a mere 33.7 percent, amounting to $18,676 dollars of unfunded liabilities for every resident of the United States. …the personal share of liability for every resident in each state, an indicator of the severity of the taxes to be borne now or in the future by each taxpayer for promises made but not funded. In Alaska, each resident is on the hook for a staggering $45,689, the highest in the nation. Connecticut, Ohio, Illinois, and New Mexico follow for the five highest per person unfunded pension liabilities.

This map is the most important takeaway from the report. It shows which states have the highest per-capita unfunded liabilities.

I’m not surprised to see Alaska, Illinois, Connecticut, and New Jersey near the bottom of the rankings. All of them were choices in my poll on which state was “most likely to collapse.”

But perhaps New Mexico, Hawaii, and Ohio should have been on that list as well.

For further background on the issue, here are some passages from a pension primer published by Forbes.

Years ago, as an actuarial student, …I remember…first, the eye-popping idea that state constitutions promised state and local employees that they could keep their existing benefits, not just for past service accruals, but for all future years of employment; and, second, the notion that it was generally accepted for public plans to be un- or underfunded… this is the story that’s repeated over and over again.  Pensions are made more generous — with high accrual rates, low retirement eligibility ages, generous cost of living provisions — as a means of providing more generous compensation to state and local employees, without actually needing to pay anything from the current year’s budget.  Costs are deferred until well after current legislators have themselves retired. …pension debt is even worse than ordinary state debts, for instance, bond issues for building up infrastructure.  Pension debt is nothing other than borrowing to pay for present-day employee salaries.

In other words, bureaucrat pensions are a scam, an opportunity for politicians to buy off a powerful voting bloc today while imposing the bill on the future.

Bureaucrats are making out like bandits, as the New York Times recently reported.

A public university president in Oregon gives new meaning to the idea of a pensioner. Joseph Robertson, …who retired as head of the Oregon Health & Science University last fall, receives the state’s largest government pension. It is $76,111. Per month. That is considerably more than the average Oregon family earns in a year. Oregon — like many other states and cities, including New Jersey, Kentucky and Connecticut — is caught in a fiscal squeeze of its own making. Its economy is growing, but the cost of its state-run pension system is growing faster. More government workers are retiring, including more than 2,000, like Dr. Robertson, who get pensions exceeding $100,000 a year. The state is not the most profligate pension payer in America… “It’s an affront to everybody who pays taxes,” said Bruce Dennis, a retired carpenter from outside Portland who earned a $54,000-a-year pension by swinging a hammer for 45 years. No one gives him extra money.

But there’s a problem with this scam.

As Margaret Thatcher famously noted, sooner or later you run out of other people’s money.

And we’re getting to that point, as illustrated by this article for the Wall Street Journal. It cites what’s happening on the state level in Connecticut.

Connecticut has just 31.7% of what it needs to pay its employees’ future retirement benefits, according to state financial reports. A fund for teachers has 52.3%. Together, that adds up to more than $37 billion in unfunded pension liabilities, or about $10,300 per Connecticut resident. Connecticut’s unfunded pension liabilities resulted from nearly 40 years of politicians making promises about benefits without adequately funding them, according to a 2015 study by the Center for Retirement Research at Boston College.

And it gives an example of trouble at the local level from a city in Michigan.

East Lansing, home of Michigan State University…is struggling with almost $125 million in unfunded pension and retiree health-care liabilities, has been cutting services… East Lansing asked MSU to pony up $100 million over 20 years to help shore up the city’s underfunded pension plan. The alternative, the city said, was asking voters to approve a 1% income tax that would hit university employees and working students. After negotiations went nowhere, the city brought the income-tax proposal before voters in a referendum last November. …On Nov. 7, East Lansing residents shot down the income-tax referendum, forcing the city to debate what services to cut to save money for the pension obligations. …The city hopes to shed another 17 police and fire positions over the next two years… Altmann suggested a long list of potential cuts to make more room in the budget for increased pension payments: closing the fire station on MSU’s campus, shuttering the city’s pool, aquatic center, dog park and soccer complex, suspending bulk leaf pickup and plowing of public sidewalks and ending annual jazz, folk, film and art festivals.

This is not going to end well.

And the problem seems to get worse every year.

Doesn’t matter who is slicing and dicing the data. The numbers always look grim.

When the next recession hits, many of these simmering problems are going to explode.

P.S. In addition to extravagant and unfunded pensions, don’t forget that state and local bureaucrats (and their federal cousins) are overpaid.

P.P.S. And if you don’t believe that they’re overpaid, then please explain why they don’t voluntarily leave their jobs for positions in the economy’s productive sector?

P.P.P.S. Also keep in mind that there are negative macroeconomic repercussions when bureaucrats are overpaid.

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I’m a big fan of federalism because states have the flexibility to choose good policy or bad policy.

And that’s good news for me since I get to write about the consequences.

One of the main lessons we learn (see here, here, here, here, and here) is that high-earning taxpayers tend to migrate from states with onerous tax burdens and they tend to land in places where there is no state income tax (we also learn that welfare recipients move to states with bigger handouts, but that’s an issue for another day).

In this interview with Stuart Varney, we discuss whether this trend of tax-motivated migration is going to accelerate.

I mentioned in the interview that restricting the state and local tax deduction is going to accelerate the flight from high-tax states, which underscores what I wrote earlier this year about that provision of the tax bill being a “big [expletive deleted] deal.”

I suggested that Stuart create a poll on which state will be the first to go bankrupt.

And there’s a lot of data to help people choose.

Technically, I don’t think bankruptcy is even possible since there’s no provision for such a step in federal law.

But it’s still an interesting issue, so I decided to create a poll on the question. To make it manageable, I limited the selection to 10 states, all of which rank poorly in one of more of the surveys listed above. And, to avoid technical quibbles, the question is about “fiscal collapse” rather than bankruptcy, default, or bailouts. Anyhow, as they say in Chicago, vote early and vote often.

P.S. I asked a similar question about bankruptcies in developed nations back in 2011. Back then, it appeared Portugal might be the right answer. Today, I’d pick Italy.

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One of the key principles of a free society is that governmental power should be limited by national borders.

Here’s an easy-to-understand example. Gambling is basically illegal (other than government-run lottery scams, of course) in my home state of Virginia. So they can arrest me (or maybe even shoot me) if I gamble in the Old Dominion.

I think that’s bad policy, but it would be far worse if Virginia politicians also asserted extraterritorial powers and said they could arrest me because I put a dollar in a slot machine during my last trip to Las Vegas.

And if Virginia politicians tried to impose such an absurd policy, I certainly would hope and expect that Nevada authorities wouldn’t provide any assistance.

This same principle applies (or should apply) to taxation policy, both globally and nationally.

On a global level, I’m a big supporter of so-called tax havens. I’m glad when places with pro-growth tax policy attract jobs and capital from high-tax nations. This process of tax competition rewards good policy and punishes bad policy. Moreover, I don’t think those low-tax jurisdictions should be under any obligation to enforce the bad tax laws of uncompetitive countries.

There’s a very similar debate inside America. Some states – particularly those with punitive sales taxes – want to force merchants in other states to be deputy tax enforcers.

I’ve written about this topic and I think even my writings from 2009 and 2010 are still completely relevant. But let’s check some other sources, starting with a column in the Wall Street Journal. It’s from 2016, but the issue hasn’t changed.

The state of Alabama is openly defying the U.S. Supreme Court in an effort to squeeze millions of dollars of tax revenue from businesses beyond its borders. …This unconstitutional tax grab cuts to the heart of the Commerce Clause, which gives Congress the power to regulate trade “among the several States.” Alabama’s regulation directly contravenes the Supreme Court’s 1992 ruling in Quill v. North Dakota. In that case, the court held that North Dakota could not require an out-of-state office-supply company to collect sales taxes because the firm had no offices or employees there. …Alabama’s revenue commissioner, Julie Magee, is putting forward an untested and suspect legal theory: The state claims that if its residents buy more than $250,000 a year from a remote business, then the seller has an “economic presence”… There are around 10,000 sales-tax jurisdictions in the U.S., with varying rates, rules and holidays, and different definitions of what is taxable. Keeping track of this ever-changing patchwork is a burden, and forcing retailers to scramble to comply would profoundly hinder interstate commerce in the Internet age.

And here are some excerpts from a column published that same year by Fortune.

When politicians call for “fairness,” it’s important to take a closer look at their definition of fair. See, for example, the nationwide push in state capitols to slap online sales taxes on out-of-state retailers—a simple tax grab… states are constitutionally prohibited from collecting sales taxes from retailers that have no presence within their borders…thanks to the U.S. Supreme Court’s 1992 ruling in Quill Corp. v. North Dakota… Any national online sales-tax system will burden online retailers to a degree never felt by brick-and-mortar businesses. Local businesses only have to deal with a limited number of sales taxes—usually only the state, county, and local levies that apply to specific stores. Online retailers, on the other hand, would have to calculate and apply sales taxes across the entire nation—and roughly 10,000 jurisdictions have such taxes. Complying with this convoluted system would necessarily raise costs for consumers and stifle competition.

And the debate continues this year. The Wall Street Journal editorialized against extraterritorial state taxing last week.

A large faction of House Republicans are pressing GOP leaders to attach legislation to the omnibus spending bill that would let states collect sales tax from remote online retailers. South Dakota Rep. Kristi Noem’s legislation…would let some 12,000 jurisdictions conscript out-of-state retailers into collecting sales and use taxes from their customers. …Contrary to political lore, sales tax revenues have been increasing steadily in states with healthy economies. Over the past five years, Florida’s sales tax revenues have grown 27%. South Dakota’s are up by nearly 30% since 2013. …Twenty or so states have adopted “click-through” taxes to hit remote retailers that have contracts with local businesses. In 2016 South Dakota invited the High Court to revisit Quillby extending its sales tax to out-of-state sellers. …the Court could enable broader taxation and regulation of out-of-state businesses. This is what many states want to happen. …Raising taxes on small business and consumers won’t be a good look for Republicans in November, nor an inducement for investment and growth.

Jeff Jacoby also just wrote on this topic for his column in the Boston Globe.

First, the flow of interstate commerce must not be impeded by one state’s impositions. And second, there should be no taxation without representation; vendors should not be liable for taxes in states where they have no vote or political recourse. The Supreme Court upheld this “physical connection” standard in a 1992 case, Quill v. North Dakota. …the high court should reaffirm it. In the 26 years since the justices rebuffed North Dakota’s claim, the case against allowing states to exert their taxing power over remote sellers has grown even stronger. …there are now 12,000 taxing jurisdictions — not only states, counties, and cities, but also parishes, police districts, and Indian reservations. A lone online seller, unprotected by the Quill rule, could be obliged to remit taxes to any combination of them, with all their multitudinous rules and definitions, tax holidays and filing deadlines. …South Dakota can impose onerous burdens on companies operating within its borders, but not on vendors whose only connection to the state is that some of their customers happen to live there. The court got it right the first time. No merchant — whether selling online, via mail order, or in a traditional shop — is obliged to be a tax collector for states it doesn’t operate in.

And here are some passages from Jessica Melugin’s article for FEE. She makes the key point that extraterritorial tax powers would undermine – if not cripple – the liberalizing impact of tax competition.

…the Remote Transactions Parity Act (RTPA)…seeks to get rid of that physical presence limit on state taxing powers. It would let states reach outside their geographical borders and compel another state’s business to calculate, collect, and remit to that first state. …the long-term effect is that this arrangement will lessen the downward pressure on taxes between jurisdictions. Think of it like this: it’s the difference between driving your car across the D.C. border to Virginia to fill up with lower Virginia gas taxes—that’s how it works now and that’s what keeps at least some downward pressure on D.C. tax rates. If D.C. made the rate high enough, everyone would exit and fill up in Virginia. But if the approach in the RTPA is applied to this thought experiment, it would mean that when you pull into that Virginia gas station, they look at your D.C. plates and charge you the D.C. gas tax rate. …it’s a makeshift tax cartel among the states. …the RTPA is a small-business killer—which is why big box retailers support it. It crushes small competitors with compliance costs. State politicians are for it because they’d rather tax sellers in other states who can’t vote them out of office. Consumers will be left with less money in their pockets and fewer choices.

By the way, there are some pro-market people on the other side. Alex Brill of the American Enterprise Institute has written in favor of extraterritorial taxation.

…lawmakers have proposed legislation to allow (not require) states to collect sales tax on goods purchased from out-of-state sellers. …critics of this legislation…argue that “internet freedom is under attack by politicians willing to distort markets and tilt the playing field toward their favored businesses.” Internet freedom is certainly not being “attacked” by a policy to improve enforcement of existing tax liability. Second, these critics oppose the legislative reform based on the belief that just because the internet benefits people, online retail activities should be advantaged by public policy. If public finance were based on this type of specious logic, we would have a tax code far more unfair and distorted than it currently is.

I actually agree with both of his arguments. Giving states extraterritorial tax powers isn’t an attack on the Internet. And I also agree that tax policy shouldn’t provide special preferences.

But neither of his points address my concern that extraterritorial tax powers give too much power to governments and undermine tax competition.

Unless he’s going to argue that Nevada’s no-income-tax status is “distorted” compared to California’s punitive system. Or unless he’s going to argue that Delaware’s no-sales-tax status is “unfair” compared to New Jersey’s onerous system.

For more information, here’s my speech to congressional staffers from 2012.

P.S. For folks who like technical details, this fight is not about Internet taxation. It’s a battle between “origin-based” taxation (basically territorial taxation) and “destination-based” taxation (basically worldwide or extraterritorial taxation). I favor the former and oppose the latter, which helps to explain my opposition to the border-adjustment tax and the value-added tax.

P.P.S. I was afraid that congressional leaders would attach a provision to the new spending bill that would allow extraterritorial taxation by states. Fortunately, that didn’t happen. So the “omnibus” plan is a pork-filled affront to fiscal sanity, but at least it’s not a state-goverment-empowering, pork-filled affront to fiscal sanity.

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In 2016, here’s some of what I wrote about the economic outlook in Illinois.

There’s a somewhat famous quote from Adam Smith (“there is a great deal of ruin in a nation“) about the ability of a country to survive and withstand lots of bad public policy. I’ve tried to get across the same point by explaining that you don’t need perfect policy, or even good policy. A nation can enjoy a bit of growth so long as policy is merely adequate. Just give the private sector some “breathing room,” I’ve argued.

I subsequently pointed out that politicians in Illinois were doing their best to suffocate the private sector, and also warned that a tax hike would push the state even closer to a day of reckoning.

Let’s apply this same analysis to California.

So here are some excerpts from a column I wrote about the Golden State in 2016

Something doesn’t add up. People like me have been explaining that California is an example of policies to avoid. Depending on my mood, I’ll refer to the state as the France, Italy, or Greece of the United States. But folks on the left are making the opposite argument. … statists…do have a semi-accurate point. There are some statistics showing that California has out-performed many other states over the past couple of years. … California may have enjoyed some decent growth in recent years as it got a bit of a bounce from its deep recession, but it appears that the benefits of that growth have mostly gone to the Hollywood crowd and the Silicon Valley folks. I guess this is the left-wing version of “trickle down” economics.

So what’s happened in California since I wrote that article?

Well, lots of California-type policies.

And where does that leave the state? Is California heading in the wrong direction faster or slower than Illinois?

Victor Davis Hanson’s column in Investor’s Business Daily has a grim assessment. He explains that California residents pay a lot for lousy government.

Some 62% of state roads have been rated poor or mediocre. There were more predictions of huge cost overruns and yearly losses on high-speed rail — before the first mile of track has been laid. One-third of Bay Area residents were polled as hoping to leave the area soon. Such pessimism is daily fare, and for good reason. The basket of California state taxes — sales, income and gasoline — rates among the highest in the U.S. Yet California roads and K-12 education rank near the bottom. …One in three American welfare recipients resides in California. Almost a quarter of the state population lives below or near the poverty line. Yet the state’s gas and electricity prices are among the nation’s highest. One in four state residents was not born in the U.S. Current state-funded pension programs are not sustainable. California depends on a tiny elite class for about half of its income tax revenue. Yet many of these wealthy taxpayers are fleeing the 40-million-person state, angry over paying 12% of their income for lousy public services.

In effect, statist policies have created two states, one for the rich and the other for the poor.

…two antithetical Californias. One is an elite, out-of-touch caste along the fashionable Pacific Ocean corridor that runs the state and has the money to escape the real-life consequences of its own unworkable agendas. The other is a huge underclass in central, rural and foothill California that cannot flee to the coast and suffers the bulk of the fallout from Byzantine state regulations, poor schools and the failure to assimilate recent immigrants from some of the poorest areas in the world. The result is Connecticut and Alabama combined in one state.

Jonah Goldberg is not quite as pessimistic. He opines that the state has certain natural advantages that help it survive bad policy.

California attracts an enormous number of rich people who think it’s worth the high taxes, awful traffic, and even the threat of tectonic annihilation to live there — for reasons that literally have nothing to do with the state’s liberal policies. Indeed, most of the Californians I know live there despite those policies, not because of them. No offense to South Dakota, but if it adopted the California model of heavy regulation, high taxes, and politically correct social engineering, there’d be a caravan of refugees heading to states such as Wyoming and Minnesota. …Wealthy liberal Californians can be quite smug about how they can afford their strict land-use policies, draconian environmental regulations, and high taxes. And wealthy Californians can afford them — but poor Californians are paying the price.

Regarding the state’s outlook, I’m probably in the middle. Goldberg is right that California is a wonderful place to live, at least if you have plenty of money. But Hanson is right about the deteriorating quality of life for the non-rich.

Which may explain why a lot of ordinary people are packing up and leaving.

A columnist from the northern part of the state writes about the exodus of the middle class.

The number of people packing up and moving out of the Bay Area just hit its highest level in more than a decade. …Operators of a San Jose U-Haul business say one of their biggest problems is getting its rental moving vans back because so many are on a one-way ticket out of town. …Nationwide, the cities with the highest inflows, according to Redfin are Phoenix, Las Vegas, Atlanta, and Nashville.

And a columnist from the southern part of the state also is concerned about the middle-class exodus.

All around you, young and old alike are saying goodbye to California. …2016 census figures showed an uptick in the number of people who fled…the state altogether. …Las Vegas is one of the most popular destinations for those who leave California. It’s close, it’s a job center, and the cost of living is much cheaper, with plenty of brand-new houses going for between $200,000 and $300,000. …”There’s no corporate income tax, no personal income tax…and the regulatory environment is much easier to work with,” said Peterson. …Nevada’s gain, our loss.

What could immediately cripple state finances, though, is out-migration by the state’s sliver of rich taxpayers. Especially now that there’s a limit on how much the federal tax system subsidizes California’s profligacy.

Here are some worrisome numbers, as reported by the Sacramento Bee.

Will high taxes lead the state’s wealthiest residents to flee the Golden State for the comparable tax havens of Florida, Nevada and Texas? Republicans reliably raise that alarm when Democrats advocate for tax increases, like the 2012 and 2016 ballot initiatives that levied a new income tax on very high-earning residents. But now, with the federal tax bill cutting off deductions that benefited well-off Californians, the state’s Democrats suddenly are singing the GOP song about a potential millionaire exodus. …Democratic state lawmakers are worried because California relies so heavily on the income taxes it collects from high earners to fund government services. The state’s wealthiest 1 percent, for instance, pay 48 percent of its income tax, and the departure of just a few families could lead to a noticeable hit to state general fund revenue. …Among high-income brackets, about 38 percent of Californians who earn more than $877,560 – the top 1 percent – would see a tax hike. About 25 percent of Californians earning between $130,820 and $304,630, also would see a tax increase… “The new tax law is kind of like icing on the cake for some who were thinking about moving out of the state,” said Fiona Ma, a Democrat on the tax-collecting Board of Equalization who is running for state treasurer. …Joseph Vranich, who leads an Orange County business that advises people on where to locate their businesses, called the tax law “one more nail in the coffin” that would cause small- and middle-size entrepreneurs to leave California.

Politicians and tax collectors get resentful when the sheep move away so they no longer can be fleeced.

This powerful video from Reason should be widely shared. Thankfully it has a (mostly) happy ending.

One of the reasons the state has awful tax policy is that interest groups have stranglehold on the political system. And that leads to ever-higher levels of spending.

Writing for Forbes, for example, Josh Archambault examines the surge of Medicaid spending in the state.

Over the past ten years, Medicaid spending in California has almost tripled, growing from $37 billion per year to a whopping $103 billion per year—including both state and federal funding. And things have only accelerated since the state expanded Medicaid to a new group of able-bodied adults. …nearly 4 million able-bodied adults are now collecting Medicaid, which was once considered a last-resort safety net for poor children, seniors, and individuals with disabilities. …California initially predicted that its ObamaCare expansion would cost roughly $11.6 billion in the first three fiscal years of the program. The actual cost during that time? An astounding $43.7 billion. …Though California represents only 12 percent of the total U.S. population, it receives more than 30 percent of all Medicaid expansion spending.

And the Orange County Register recently opined about the ever-escalating expenses for a gilded class of state bureaucrats.

California’s annual state payroll grew by 6 percent in 2017, an increase of $1 billion and twice the rate of growth of the previous year. …Employee compensation is one of the largest components of the General Fund budget. In 2015-16, salaries and benefits accounted for about 12 percent of expenditures from the General Fund, a total of over $13 billion. …pay increases drive up pension costs. …The administration estimated that the annual cost to the state for the pay raises would be $2 billion by 2020-21, but the LAO said that didn’t take into account the higher overtime costs that would result from higher base pay, or the extra pension costs from that overtime. …if an economic downturn caused state revenues to decline, taxpayers would still have to pay the high and rising salaries for the full length of the contract.

The last sentence is key. I’ve previously pointed out that California has a very unstable boom-bust fiscal cycle. The state looks like it’s in good shape right now, but it’s going to blow up when the next recession hits.

Let’s close by acknowledging that poor residents also pay a harsh price.

Kerry Jackson’s article in National Review is rather depressing.

California — not Mississippi, New Mexico, or West Virginia — has the highest poverty rate in the United States. According to the Census Bureau’s Supplemental Poverty Measure — which accounts for the cost of housing, food, utilities, and clothing, and which includes non-cash government assistance as a form of income — nearly one out of four Californians is poor. …the question arises as to why California has so many poor people… It’s not as if California policymakers have neglected to wage war on poverty. Sacramento and local governments have spent massive amounts in the cause, for decades now. Myriad state and municipal benefit programs overlap with one another; in some cases, individuals with incomes 200 percent above the poverty line receive benefits, according to the California Policy Center. California state and local governments spent nearly $958 billion from 1992 through 2015 on public welfare programs.

That’s probably a partial answer to the question. There’s a lot of poverty in the state because politicians subsidize idleness. In effect, poor people get trapped.

The author agrees.

…welfare reform passed California by, leaving a dependency trap in place. Immigrants are falling into it: Fifty-five percent of immigrant families in the state get some kind of means-tested benefits… Self-interest in the social-services community may be at work here. If California’s poverty rate should ever be substantially reduced by getting the typical welfare client back into the work force, many bureaucrats could lose their jobs. …With 883,000 full-time-equivalent state and local employees in 2014, according to Governing, California has an enormous bureaucracy — a unionized, public-sector work force that exercises tremendous power through voting and lobbying. Many work in social services. …With a permanent majority in the state senate and the assembly, a prolonged dominance in the executive branch, and a weak opposition, California Democrats have long been free to indulge blue-state ideology.

And one consequences of California’s anti-market ideology is that poor people are falling further and further behind.

P.S. If Golden State leftists really do convince their neighbors to secede, I suspect the country would benefit and the state would suffer.

P.P.S. And if California actually chooses to move forward with secession, the good news is that we already have a template (albeit satirical) for a national divorce in the United States.

P.P.P.S. Closing with some California-specific humor, this Chuck Asay cartoon speculates on how future archaeologists will view the state. This Michael Ramirez cartoon looks at the impact of the state’s class-warfare tax policy. And this joke about Texas, California, and a coyote is among my most-viewed blog posts.

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States such as Illinois, California, New York, Connecticut, and New Jersey have very serious structural problems because of high tax burdens and unsustainable spending levels (often associated with excessive pay and benefits for bureaucrats).

I frequently write about those big issues, but I also like to periodically share examples of other bone-headed policies at the state level. These are not the types of policies that threaten bankruptcy, but they illustrate why it’s not a good idea to give power to politicians and bureaucrats.

Here are some new examples.

We have a column in Forbes about the dangerous plague of unlicensed and unregulated (gasp!) cakes in New Jersey.

At first, she sold her baked goods to support her son’s school fundraisers. …Soon Heather started receiving requests from family, friends, sports fundraisers, and even a wedding venue. …With this business, Heather hoped she could pay for her son’s college education and one day open her own brick-and-mortar cake pop shop. Unfortunately, her dreams were dashed thanks to a law that exists only in New Jersey. Unlike 49 other states, selling baked goods made at home is illegal in the Garden State. Baking and selling just one cake, cookie or muffin risks fines as high as $1,000. When Heather learned she had to shut down her cake pop sideline, the news was “crushing,” she said.

As is so often the case when governments are suppressing liberty, “health and safety” is the excuse.

New Jersey’s main justification for the ban is to protect the public’s health and safety—a claim that’s belied by the fact that nearly every other state has a “cottage food” law on the books, which legalizes the sale of homemade cakes, cookies, jams and other food deemed “not potentially hazardous.” …In order to sell cake pops, cookies or other shelf-stable treats in New Jersey, Heather must either build a licensed “retail food establishment” separate from her home kitchen or she can rent a commercial kitchen, which can easily cost $35 an hour.

Fortunately, the Institute for Justice is fighting to overturn the law.

Heather and two other home bakers joined with the Institute for Justice and filed a lawsuit against the state earlier this month. …A similar IJ lawsuit has already defeated a pastry prohibition in Wisconsin. Over the summer, a Wisconsin judge struck down the state’s ban on selling home-baked goods because there was “no real or substantial connection” between the law and public safety. …In his ruling, Lafayette Circuit Court Judge Duane Jorgenson noted that the ban protected established businesses from greater competition, which is why groups like the Wisconsin Bakers Association heavily backed the law. …Those rulings followed a 2015 IJ court victory on behalf of home bakers in Minnesota, which galvanized the state to expand its cottage food laws. Now the state boasts over 3,000 cottage food producers.

Notice, by the way, that protecting an established interest group was the real purpose of the law. In other words, the law was basically similar to schemes for occupational licensing.

This next item is so strange that I wonder whether it is somehow fake. But I also suspect it’s too bizarre to be fake. In any event, I wonder about the reason for this government-mandated notice?!? And if you find a (gasp!) vending machine without the notice, what purpose is served by calling the number? And do the bureaucrats expect people to memorize the number in case they stumble upon a rogue vending machine?!?

Oh, and how long before some people figure out how to remove the notice and then call the government in hopes of getting the “cash reward”?

If anybody knows the answer to any of these questions, feel free to share your thoughts. In the meantime, I’ll simply assume that the notice presumably isn’t as pointless and stupid at this pedestrian sign and definitely not as creepy and malevolent as this “public service” notice.

Next, we have a story from ABC News about taxpayer-funded generosity to pets in Michigan.

A dog in western Michigan has been approved for unemployment benefits — and he’d be bringing in a cool $360 a week. Michael Haddock, of Saugatuck, Michigan, says he received a letter on Saturday from the State of Michigan Unemployment Insurance Agency (UIA) addressed to Michael Ryder, according to Grand Rapids ABC affiliate WZZM. Michael is his name. Ryder is his dog’s name. …Haddock says the employer listed on the letter was a restaurant chain in Metro Detroit. After receiving the letter, Haddock contacted the restaurant chain and the state unemployment office. …The Michigan UIA announced Tuesday it was creating a special investigative unit to handle the recent increase in fake unemployment claims. The agency attributes many of the claims to recent data breaches. Haddock isn’t sure how scammers got his dog’s name.

I’m clearly behind the times. I have some cats that need to sign up for handouts!

On a more serious note, I confess that I’m not aware of the degree to which unemployment benefits are fraudulent. Hopefully it’s not as bad as the EITC, though I’m confident that problem is bigger than politicians and bureaucrats would ever admit.

And why would folks in the government even care? After all, it’s our money they’re squandering rather than their own. And Milton Friedman educated us on what that means.

From the perspective of good public policy, though, the real problem with such benefits (as personalized here and here) is that they lure people into extended periods of joblessness.

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I explained back in 2013 that there is a big difference between being pro-market and being pro-business.

Pro-market is a belief in genuine free enterprise, which means companies succeed of fail solely on the basis of whether they produce goods and services that consumers like.

Pro-business, by contrast, is a concept that opens the door to inefficient and corrupt cronyism, such as bailouts and subsidies.

It basically means big business and big government get in bed together. And that’s going to mean bad news for taxpayers and consumers.

Washington specializes in this kind of cronyism. The Export-Import Bank, ethanol handouts, TARP, and Obamacare bailouts for big insurance firms are a few of my least-favorite examples.

But state politicians also like giving money to rich insiders.

A report in the Washington Post reveals how states are engaged in a bidding war to attract Amazon’s big new facility, dubbed HQ2.

Maryland Gov. Larry Hogan (R) will offer more than $3 billion in tax breaks and grants and about $2 billion in transportation upgrades to persuade Amazon.com to bring its second headquarters and up to 50,000 jobs to Montgomery County. …It appears to be the second-most generous set of inducements among the 20 locations on Amazon’s shortlist. Of the offerings whose details have become public, either through government or local media accounts, only New Jersey’s is larger, at $7 billion.

Richard Florida, a professor at the University of Toronto, explains to CNN why this approach is troubling.

…there’s one part of Amazon’s HQ2 competition that is deeply disturbing — pitting city against city in a wasteful and economically unproductive bidding war for tax and other incentives. As one of the world’s most valuable companies, Amazon does not need — and should not be going after — taxpayer dollars… While Amazon may have the deck stacked in picking its HQ2 location, the mayors and elected leaders of these cities owe it to their tax payers and citizens to ensure they are not on the hook for hundreds of millions and in some cases as much as $7 billion in incentives to one of the world’s most valuable companies and richest men. …The truly progressive thing to do is to forge a pact to not give Amazon a penny in tax incentives or other handouts, thereby forcing the company to make its decision based on merit.

It’s not just a problem with Amazon.

Here’s are excerpts from a column in the L.A. Times on crony capitalism for Apple and other large firms.

State and local officials in Iowa have been working hard to rationalize their handout of more than $208 million in tax benefits to Apple, one of the world’s richest companies, for a data facility that will host 50 permanent jobs. …the Apple deal shows the shortcomings of all such corporate handouts, nationwide. State and local governments seldom perform cost-benefit studies to determine their value — except in retrospect, when the money already has been paid out. They seldom explain why some industries should be favored over others — think about the film production incentives offered by Michigan, Louisiana, Georgia and, yes, Iowa, which never panned out as profit-makers for the states. …the handouts allow big companies to pit state against state and city against city in a competition that benefits corporate shareholders almost exclusively. Bizarrely, this process has been explicitly endorsed by Donald Trump. …politicians continue to shovel out the benefits, hoping to steer their economies in new directions and perhaps acquire a reputation for vision. Nevada was so eager to land a big battery factory from Tesla Motors’ Elon Musk that it offered him twice what Musk was seeking from the five states competing for the project. (In Las Vegas, this is known as “leaving money on the table.”) Wisconsin Gov. Scott Walker gave a big incentive deal to a furniture factory even though it was laying off half its workforce. He followed up last month with an astronomical $3-billion handout to electronics manufacturer Foxconn for a factory likely to employ a fraction of the workforce it forecasts.

And here’s an editorial from Wisconsin about a bit of cronyism from the land of cheese.

The Foxconn deal…should be opposed by Democrats and Republicans, liberals and conservatives. There are no partisan nor ideological “sides” in this debate. The division is between those who want to create jobs in a smart and responsible way that yields long-term benefits and those who propose to throw money at corporations that play states and nations against one another. The Foxconn deal represents the worst form of crony capitalism — an agreement to transfer billions of dollars in taxpayer funds to a foreign corporation. …Walker offered the company a massive giveaway — discussions included a commitment to hand the Taiwanese corporation nearly $3 billion in taxpayer funds (if it meets hazy investment and employment goals), at least $150 million in sales tax exemptions…the Legislative Fiscal Bureau, which analyzes bills with budget implications…pointed out that Foxconn would receive at least $1.35 billion and possibly as much as $2.9 billion in tax incentive payments even if it didn’t owe any Wisconsin tax… This is a horrible deal.

Let’s now circle back to Amazon and consider how it gets preferential treatment from the Post Office.

I don’t feel guilty ordering most of my family’s household goods on Amazon. …But when a mail truck pulls up filled to the top with Amazon boxes for my neighbors and me, I do feel some guilt. Like many close observers of the shipping business, I know a secret about the federal government’s relationship with Amazon: The U.S. Postal Service delivers the company’s boxes well below its own costs. Like an accelerant added to a fire, this subsidy is speeding up the collapse of traditional retailers in the U.S. and providing an unfair advantage for Amazon. …First-class mail effectively subsidizes the national network, and the packages get a free ride. An April analysis from Citigroup estimates that if costs were fairly allocated, on average parcels would cost $1.46 more to deliver. It is as if every Amazon box comes with a dollar or two stapled to the packing slip—a gift card from Uncle Sam. Amazon is big enough to take full advantage of “postal injection,” and that has tipped the scales in the internet giant’s favor. …around two-thirds of Amazon’s domestic deliveries are made by the Postal Service. It’s as if Amazon gets a subsidized space on every mail truck.

In this last example, the real problem is that we’ve fallen behind other nations and still have a government-run postal system.

The way to avoid perverse subsidies is privatization. That way Amazon deliveries will be based on market prices and we won’t have to worry about a tilted playing field.

And that last point is critical.

Yes, cronyism and corporate welfare is an economic issue. It is bad for long-run growth when political favors distort the allocation of capital.

But an unlevel playing field is also a moral issue. It’s simply not fair or not right for politicians to give their buddies special advantages.

And it’s both economically harmful and morally harmful to create a system where the business community views Washington as a handy source of unearned wealth.

For what it’s worth, I also think it should be a legal issue. For those of us who believe in the rule of law, a key principle is that everyone should be treated equally. Heck, that principle is enshrined in the Constitution.

So I’ve always wondered why courts haven’t rejected special deals for specific companies because of the equal-protection clause?

Then again, maybe I shouldn’t wonder. After all, the Supreme Court twisted itself into a pretzel to miraculously rationalize Obamacare.

But none of this changes the fact that it’s time to wean big business off corporate welfare.

P.S. Just in case you harbor unwarranted sympathy for big companies, remember that these are the folks who are often keen to undermine support for the entire capitalist system.

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