State Budgets on Fiscal Crack

by James A. Bacon

The 50 states of the republic are conducting a fascinating, real-world  experiment in tax policy. The Democratic-dominated “blue states” are jacking up income taxes while some Republican-dominated “red states” are shifting the tax burden from income to consumption taxes. Which gambit will prove the most enduring path to prosperity?

Joel Kotkin, writing for NewGeography.com, sees the blue states as doubling down on a suicidal strategy that will drive out the middle-class and the well off, hollowing out their tax bases in the process.

If you’re part of the Silicon Valley or Manhattan wealth-creation clusters, it’s worth staying put no matter how high the taxes. But if your business is not tightly bound to an industry-specific ecosystem, you have every reason to flee. Between 2006 and 2009, Kotkin writes, California lost a net 45,000 taxpayers earning between $5 million and $300,000 a year.

“To be sure,” he writes, “the outward movement slowed during the recession, but more recently the pattern has reasserted itself. Last year, all ten of the leading states gaining domestic migrants were low-tax states including five with no income tax: Texas, Florida, Tennessee, Washington and Nevada. In contrast high-tax New Jersey, New York, Illinois and California suffered the highest rates of out-migration.”

Federal Reserve Board policy is propping up the blue-state economies right now, Kotkin suggests. Low interest rates are flushing money out of fixed-income investments into stocks and real estate, driving up prices, enriching the wealthy and creating a boom in capital gains income. (If you want to know why the income gap continues to widen during the Obama administration, you need to look no further. The Obama/Bernanke policy is immiserating small savers, who earning next to nothing on their bank CDs and money market funds, while enriching those who own stocks and real estate.)

Higher income taxes serve as an equivalent to what economist Suzanne Trimbath calls ‘fiscal crack.’ For a short period there’s euphoria, as tax revenues flow in and the economy seems to recover. Yet the real problems, such as inadequate private-sector job growth, are never addressed, and as the high fades, the state again faces a loss of jobs and people.

All bubbles eventually collapse. The Fed cannot maintain its zero-interest rate policy forever. Eventually, interest rates will rise, depressing stock and real estate prices. Blue-state tax revenues, which are disproportionately dependent upon cyclical revenue sources like capital gains, will plummet. And the blue states, having already driven out many productive taxpayers, will have nowhere to turn.

Virginia is sitting on the sidelines of income tax reform, content to keep its top rate at a moderate 5.75%. In a world in which high-earning (and taxpaying) individuals are as mobile as ever, the Old Dominion is positioning itself as neither a winner nor a loser.

Instead, Virginians are consumed by the need to raise tax revenue for transportation. The General Assembly has made the decision to raise taxes; the only question now is whether to go with the House version, the Senate version or some hybrid of the two. Unfortunately, the move to raise taxes is not accompanied by any effort to demand more accountability for the transportation dollars we spend. By enacting higher taxes to pay for projects offering dubious economic payback, Virginia is inching toward the blue-state governance model. We don’t have the worst tax regime in the country, but ours is far from the best.

2 Responses to State Budgets on Fiscal Crack

  1. There are two states that don’t have income taxes nor sales taxes.

    Do you know which states they are?

    do you know of these two states – how they fare economically as a result of not having either tax?

  2. Jim Bacon can’t see the forest for the trees when it comes to Virginia. The absolute criminals we elect to the General Assembly just defeated a proposal by Chap Petersen to cap corporate welfare at 5 years worth of tax credits. After that, the credit would require a vote by the General Assembly to continue the credit.

    These tax credits cut $2B per year from Virginia’s tax receipts. Yes, you read that right – two billion per year.

    That’s $1,600 more dollars every year for each and every child enrolled in Virginia K-12 public schools.

    That’s enough money to send 40,000 Virginia students to an in-state university for free.

    It is twice as much as the state says it needs for maintaining and expanding the roads.

    Meanwhile, there is no accountability or auditing of these corporate tax breaks. Here is what State Senator Chap Petersen had to say on his blog:

    “My proposal would have put an automatic five-year sunset on all state tax credits, which are currently costing Virginia over $2 billion in lost revenue. We have no idea whether those credits are worthwhile. In my experience, no tax credit has ever been repealed — or even audited for its effectiveness.”.

    However, Petersen’s estimated benefit of $2B per year might be an extremely lowball calculation. Here is what the Virginia Pilot had to say:

    “The Joint Legislative Audit and Review Commission noted in a 2011 report that tax breaks, ranging from exemptions to credits, amount to some $12.9 billion in lost state revenue.”.

    http://hamptonroads.com/2013/01/business-tax-breaks-shouldnt-be-forever

    Jim, the problem in Virginia is that our General Assembly is largely composed of dishonest, corrupt, sleazy, theiving scumballs who consistently sell out Virginians in favor of special interests.

    DC has nothing on Richmond when it comes to institutional corruption.

    Here is the list of absolute slimeballs who voted down the bill:

    NAYS–Alexander, Blevins, Carrico, Colgan, Ebbin, Edwards, Favola, Hanger, Herring, Howell, Marsden, Marsh, Martin, McDougle, McEachin, McWaters, Miller, Puckett, Puller, Reeves, Ruff, Saslaw, Stanley, Stosch, Vogel, Wagner, Watkins–27.

    Jim – as long as we have blatant crooks in office we will not improve the state.

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