State Tax Burdens Slow Recovery, Deter Investment

State Tax Burdens Slow Recovery, Deter Investment


Even as our nation’s debt climbs above $14 trillion and heads towards 100 percent of GDP – red flag territory – there are those who oppose spending cuts. Instead, they advocate for higher taxes, arguing that the economic recovery could be undermined by reduced federal outlays. How can they possibly ignore the living laboratory of our states and municipalities? Simply put, low-tax states are growing; those that levy onerous penalties on individuals and businesses are shrinking. These latter jurisdictions find themselves in a downward spiral where remedies become only more dire the longer they put off taking politically unpleasant medicine.

As cities and states around the country struggle to close gaping budget gaps, the consequences of profligacy are all too evident. Shifts in job creation and population are proof positive that fiscal policies determine the health of communities. Those states with high taxes and imprudent spending have lost people and jobs, while those with lower tax regimes and who have courted private enterprise are flourishing. This undeniable (and some might think obvious) lesson – and its application to federal budget-making – is still obscure to many in Congress, and in the White house.

Richard Fisher, head of the Dallas Federal Reserve Bank and noted inflation hawk, recently addressed a Manhattan Institute gathering on the perils of unbalanced budgets. As he noted, all 50 states are subject to one and only one monetary policy, which is of course set by the Federal Reserve. However, each state employs its own fiscal policies. Hence, the success or failure of those domains can be traced directly to tax and spend decisions.

What are the consequences of those varying decisions? Mr. Fisher presented one chart that says it all. It shows “total nonagricultural employment by district” for each of the Fed’s twelve regions from 1990 to the present. There are few surprises. Dallas has far outpaced the country’s other regions in job creation, followed by Kansas City, Minneapolis and Atlanta. At the absolute bottom of the pack lies New York, where the number of jobs has barely increased in two decades. Boston, Cleveland and Chicago fared only slightly better.

The Lure of Low-Tax States
The most recent census data confirms that low tax states like Texas and Florida continue to exert a strong gravitational pull, while high-tax locales like California and Massachusetts are driving people away. Overall, the census reports, the population in the U.S. grew 9.7 percent in the past decade, the weakest gain in the past seventy years. It is likely that the regional shifts would have been more pronounced but for the recession and accompanying collapse in the housing market. Unable to sell their homes, many Americans were constrained from migrating to more promising locales. Still, the winners and losers are clear-cut.

Which states beckon? There is a demonstrable parallel between states cited for low tax or business-friendly policies by the Tax Foundation and those whose populations grew in the past decade. For instance, Texas’ population grew by 21 percent, benefiting from both a rising number of Hispanic immigrants and an inflow from elsewhere in the country. Texas has no personal income tax and ranks 13th in terms of attractiveness to businesses. Florida, Washington and Nevada have no income tax; all three expanded more rapidly than the country as a whole – by 18 percent, 14 percent and 35 percent respectively. Also appearing in the top five most attractive states in terms of individual income taxes is Alaska, where the population increased 13.3 percent, putting to rest the notion that it’s all about warm weather. Similarly, South Dakota favors its citizens with low taxes. Though that state only grew by 8 percent, nearby neighbor North Dakota attracted less than 5 percent more residents in the past ten years.

Of course, people move for a variety of reasons. Low personal or property taxes may attract self-employed or retired people, but many younger folks travel in search of jobs. Thus, a state’s appeal to employers would also be expected to line up with population shifts. The ten states ranked by the Tax Foundation as most attractive in terms of business tax climate are (in order) South Dakota, Alaska, Wyoming, Nevada, Florida, Montana, New Hampshire, Delaware, Utah and Indiana. Geographically diverse, all of those states grew at or above the national average except for South Dakota, New Hampshire (up 6.5 percent) and Indiana (up 6.6 percent) In those latter cases, the states grew much ahead of their neighbors; New Hampshire outpaced Vermont and Massachusetts (both up about 3 percent) while Indiana clearly outperformed Illinois, which grew at only 3.3 percent.

Needless to say, there are many variables which impact population growth. However, it would be hard to find a variable that determines success more reliably than low tax rates. On the other side of the ledger, those who advocate high spending – for example on welfare programs or housing assistance – will struggle to show that state-financed generosity attracts residents. That’s an issue for another column, but I note that a CBS poll just released reports that 77 percent of all Americans want to cut spending to balance our country’s budget; only 9 percent advocate raising taxes. In other words, a hefty majority agrees with Indiana governor Mitch Daniels, who famously says “You’ll be surprised how much government you won’t miss.”

The tough issue today is that many states have gotten themselves into a deep hole and are faced with terrible choices. Raise taxes, and almost certainly scare away residents, or cut services. While spending cuts are anathema to those closely allied with public employee unions, they are spreading as state political leaders bow to the inevitable. The alternatives are just too risky. In Illinois, for instance, lawmakers just agreed to raise taxes 67 percent to plug their budget hole. Does anyone want to guess what Illinois’ growth rate will look like in the next census?

The lesson seems obvious. The concern for all Americans is that those moving vans don’t just take businesses and productive people across state borders, but overseas as well.

Related Links:
States Continue to Feel Recession's Impact (CBPP)
Population Growth Slowest Since 1940, Census Shows (MSNBC)