Second, the title of the article contains a disclaimer: "overtaxing." This is obviously a subjective measure. Two people might have a different view on the same level of taxation, one thinking it is fair and one thinking it is too generous to the rich. The point of this post and others to follow is not to arrive at what "fair" is but to understand the ramifications of what happens when the economy's producers are taxed at higher and higher levels, regardless of what each person thinks is fair.
Today's discussion is based on a short article in the May 8, 2011 St. Petersburg Times business section. The article quoted a survey done by the magazine, "Chief Executive," which surveyed what were the best and worst states for business. The best states for business turned out to be the following:
- Texas
- North Carolina
- Florida
- Tennessee
- Georgia
- California
- New York
- Illinois
- New Jersey
- Michigan
- The best states tend to be in the southern part of the country whereas the worst states tend to be in the northern part of the country with the exception of California.
- The best states tend to be in states that historically have been dominated by Republicans in office and the worst states tend to be dominated by Democrats in office.
- The best states are likely to have more lenient right to work laws while the worst states tend to have stronger, more restrictive union regulations.
- Let's first look at state government debt levels. Theoretically, no person or business would want to live in a state that was in severe debt trouble since the solution for solving that debt problem is probably going to be higher taxes and lower service levels from the state government. According to a January, 2010 Forbes magazine study, Illinois is in the worst debt situation of all fifty states, New York is in the second worst shape, California is in the fourth worst shape and New Jersey is in the fifth worst shape. Since the article did not write about more than the ten worst, the reminder of the states' positions was not available. However, none of the states that were the five best for business listed above were in the ten worst positions relative to debt.
- What about taxes? it seems logical that families and businesses would want to live where the tax burden is the least, all other things being equal. According to a state based website, www.statemaster.com, as far as total tax burden (income taxes, property taxes, sales taxes, etc.) the worst five states for business listed above all ranked in the worst half of the fifty states while the best five state for business all ranked in the better half of the fifty states.
The average ranking of the worst five states was about 12th worst while the best five states average rank was about 40th. Thus, the best states for business have a distinct advantage since they impose a far lower tax burden on their residents. Note: this analysis does not include the latest substantial tax increases passed by the Illinois state government which would make this bad tax state even worse going forward.
- What about population trends? If you use population trends as a surrogate for long term growth, you might see where the future of the country lies from an economic growth perspective. One approach would be to look at the states that lost and gained seats in Congress as a result of the 2010 Census.
Turns out that the states listed as the worst for business lost a total of five Congressional seats as a result of population changes over the past ten years. the five states listed as the best states gained seven Congressional seats as a result of long term population changes.
- The only important measure where there is not a substantial difference between the two lists is the current unemployment picture. Both lists have relatively good performers for unemployment level and relatively bad performers. However, which states do you think will recover more quickly, those with lower taxes, growing populations, and lower state debt or those with higher taxes, shrinking populations, and higher state debt?
The point to be made is that higher and higher taxes and debt usually result in worst and worst effects. Individuals, families, and businesses will react and change their behavior according to many factors including the level of taxation. Let me repeat: people and businesses will change their behavior based on taxation levels. These individual changes in behavior may not be the right economic decisions for the greater good, even if the tax levels are raised. Thus, those states that adhere to the principle that the rich can always pay more in taxes, usually end up losing in the long run.
The textbook example is probably the state of Maryland. A number of years ago they decided to raise the state income tax rate on millionaires living in the state, expecting to annually get an additional $106 million worth of tax revenue from the increase,
However, when the tax returns were tabulated, it turned out that rather than gaining $106 million more in tax revenue from these people, the state actually ended up getting $257 million less in tax revenue (Wall Street Journal - March 12, 2010). The number of millionaires filing taxes actually dropped by 30% as a possible result of 1) some died and did not need to file, 2) some had bad economic years and did not make a million dollars and 3) some moved out of Maryland into states that were more tax friendly. If I was betting, I would bet the third factor was the biggest component since: I doubt 30% of the millionaires all died in one year and I doubt 30% all of a sudden did not make a million dollars, especially since the article did not report similar drops of income for millionaires in the 30% range in surrounding states.
Was it fair to make the rich in Maryland pay more in taxes? I do not know and that also is a subjective judgement. However, understand that by making them pay more, many of them took themselves and their families and possibly there business elsewhere along with their tax receipts. They also took their disposable income that they may have spent on Maryland restaurants, movies, clothes, cars, etc. The state government may have lost $257 million in tax revenue directly but the state as a whole probably lost a lot more in disposable income and jobs.
The lesson to the political class that run the different levels of government and the people that vote them in: running a low debt, low tax government operation is the best way to have a growing population, a growing economy, steady job creation, and stability. Anything else is stupid, no matter how fair or unfair you think it is.
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