John Taylor,
President of the Virginia Institute for Public
Policy, publisher of Virginia Viewpoint.
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Gov.
Mark R. Warner has proposed a huge increase in the
aggregate tax burden of Virginians. To be sure, the
tax hike is disguised in a “tax reform” bill.
Gov. Warner believes that higher state revenues are
necessary to finance important governmental
functions and will benefit the people of the state.
There is a host of empirical evidence, however, that
suggests otherwise.
Literally
dozens of studies show that there is an inverse
relationship between the overall tax burden and
economic growth – higher taxes, lower growth. This
relationship holds for different areas, time
periods, and ways of measuring growth. It holds
using widely differing methodologies.
For
example, over the long period 1967-97, the 25 states
with the highest overall tax burden had 50 percent
per capita income growth adjusting for inflation,
while the 25 states with the lowest burden had an
average 72 percent growth, which translates into
literally thousands of dollars more annual income
per family by the end of the period. Statistics also
indicate that people tend to migrate out of high tax
states into low tax ones. For example, from 2000 to
2002, there was net out-migration of native-born
Americans from the ten highest tax states of
371,000; by contrast, the ten lowest tax states,
including Virginia,
had net in-migration of 729,000. Human resources
flee high tax jurisdictions for low tax ones.
The
nonpartisan Tax Foundation calculates that
Virginia
had the 11th lowest state and local tax burden in
2003. It is not coincidental that by all measures Virginia
has exceeded the national average in terms of
economic growth – higher per capita income growth,
greater population growth, more growth in total
personal income. A favorable tax climate has been an
important contribution to the state’s economic
health.
One
reason high taxes have negative effects on a
state’s welfare is that they impose what
economists call “deadweight losses.” Some of the
gains to consumer welfare from trades (where both
sellers and buyers benefit) are lost when taxes
crowd out private exchanges of goods and services.
Aggravating the problem is the fact that most
private sector activity is produced efficiently in
competitive markets, while most governmental
activity is produced in a monopolistic non-market
environment where there are few incentives to
perform efficiently and in an innovative fashion.
The
Warner tax “reform” package is bad for other
reasons as well. It proposes increasing the
progressivity of the state income tax by raising
taxes on the “rich” (defined as anyone making
$100,000 or more a year), while lowering them for
some lower income people. Research shows that of all
major taxes, the individual income tax has the worst
impact, dollar for dollar, on economic activity.
Moreover, states with flat rate structures tend to
do better than states with similar income tax
burdens but highly progressive rates. Raising the
top rate is absolutely the worse single fiscal
policy move that Virginia
could make from the standpoint of economic growth.
This outmoded and discredited “soak the rich”
philosophy would serve to lower income generally for
all Virginians, rich and
poor alike.
Putting
all of these arguments aside, proponents of the tax
changes might argue that the state needs the
revenues or services to citizens will have to be
slashed. As a non-Virginian, I cannot evaluate this
argument definitively. Yet I would ask the following
questions.
Have
you moved to a more efficient, market-based approach
for providing health care services (e.g., Medicaid)?
Have
you moved to rationalize public education spending,
rewarding the highly productive and efficient
districts and staff, while punishing the less
efficient providers of education? More generally,
have you moved towards a market-based, more
competitive schooling environment (school choice)?
Have
you closely examined staffing changes at your state
universities to see if, as I am nearly certain,
staff is growing faster than enrollments?
Have
you privatized activities more efficiently provided
by the private sector, including prisons, highway
maintenance, and college dormitories?
If
the answer is mostly “no” to the above
questions, increasing tax revenues only encourages
the continuation of what are clearly inefficient and
wasteful practices.
Virginians
should be wary of so-called tax reform, particularly
when there is ample reason to believe that it means
tax increases that will stifle the spirit of
enterprise and growth.
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February 2, 2004
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