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John Taylor,
President of the Virginia Institute for Public
Policy, publisher of Virginia Viewpoint.
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Recent
data reveal Virginia
has the 11th highest level of per capita income
of the fifty states, and also the eleventh lowest
tax burden in terms of state and local taxes as a
percent of personal income. Those identical ranks
are not entirely coincidental, since there is an
abundance of evidence that suggests low taxes are
associated with high economic growth. Virginia
has progressed from being a relatively poor state to
a fairly rich state over time for many reasons, but
one of them is that it has been more restrained than
most states in taxing its citizenry.
Compare
Virginia
with my adopted state of Ohio. In 1970, Ohio’s per capita income exceeded Virginia’s by about seven percent. Today, Virginia
outdistances
Ohio
on this important measure by more than eleven
percent. Why? In part, because Ohio
retrogressed from being a relatively low tax state
to a relatively high tax state, while Virginia
did not. For example, the Tax Foundation (a
respected nonpartisan group in our nation’s
capital) suggests Ohio went from having the fourth
lowest tax burden to having the 10th highest, while
Virginia was well below average in both years (going
from 36th to 40th).
Taxes
impact in other ways as well. Consider net migration
of Americans. I compared the tax burden for the ten
states (including Virginia)
with the greatest in-migration from 2000 to 2002, with the ten states with the greatest out-migration.
The overall state and local tax burden was more than
ten percent higher in the states with the greatest
out-migration. People literally “voted with their
feet”, fleeing states with high taxes, and moving
into states with low ones.
Why
is a state’s economic vitality negatively related
to its tax burden? While state and local governments
do some things well, they suffer from two major
disabilities compared with the private sector: They
are less competitive, and they are less influenced
by the market. While private firms compete
vigorously with others for business, forcing them to
offer low prices and high product quality, many
government activities (e.g., public schools) have
little competition, and thus few incentives to offer
high quality services in an efficient manner.
Similarly,
there is a clear “bottom line” in the private
sector - profits. To be more profitable, a firm must
cut costs (becoming more efficient), or increase
revenues (by making a more attractive product). The
discipline of the market forces efficiency and good
service. There is no such “bottom line” with
government, no incentives to cut costs or
“reinvent” itself. High tax states have bigger
governments, which mean they “crowd out” more
highly productive private activity.
To
be sure, some taxes are worse than others in their
economic impact. Consumption taxes seem to have less
adverse impact than taxes on productive activity,
such as income taxes. The negative correlation
between state and local income taxes and economic
vitality is breathtakingly striking. For example,
from 1990 to 1999, more than 2.8 million native-born
Americans moved into the nine states without state
and local income taxes from the 41 states
that had such taxes.
What
are the implications of all of this for Virginia? First, keep taxes low. To do that, of course,
requires keeping government spending down. Given the
upward pressures to spend for Medicaid and
education, a successful approach to keeping low
taxes may mean reforming the way medical and
educational assistance is provided by introducing
market-based incentives to producers and consumers
of educational and medical services. Similar reforms
may be required for other areas as well, such as
corrections spending.
That
means, of course, that Virginia
must “just say no” to new taxes, standing up to
the special interest groups demanding them. At some
point, new constitutional restraints on spending
might be useful in assuring that this happens - a
supermajority requirement for new taxes, or a
required vote of the people.
The
empirical evidence showing the debilitating impact
of income taxation should also be taken into
account. An effort should be made to lower Virginia’s moderately high income tax burden. This perhaps
cannot be done overnight, but the growth in
inflation-adjusted state tax revenues over time
provides a fund that can be used to finance
sustained tax reduction.
Virginia
is better than a majority of states in terms of its
tax policy, but very far from perfect. A recent Tax
Foundation ranking of states on their business
climate ranked Virginia
21st, a bit above average, but well below
that of such leading economic growth states as Colorado. If the prosperity of the past generation is to be
maintained and enhanced, Virginia
governments need to constrain their spending growth,
allowing for some needed tax reduction and an
improvement in the state’s tax climate.
--
November 17, 2003
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