The reason for returning to this topic in the midst of our corruption series is because there have been some significant developments in the race to bankruptcy court. However, before reviewing the latest news and seeing which state or city is making the best progress towards government bankruptcy, let’s review how these cities and states got themselves into this financial death spiral position to begin with:
- A government entity keeps expanding its budget, eventually putting pressure on the tax revenue stream it receives.
- At some point, rather than cut government spending or make its programs more efficient financially, the politicians in charge raise taxes to meet the ever growing government expenditures.
- The raising of taxes causes some residents and businesses to leave the city or state for less tax burdensome areas, reducing the tax base and reducing the revenue stream.
- Rather than cut expenses and become more efficient to match the reduced tax revenue stream, politicians in the above cities or states raise the tax burden even more.
- This causes more residents and businesses to flee the city or state, further reducing the tax base and tax revenue stream.
- At some point politicians panic and raise taxes more and start cutting vital government services (e.g. police, fire, education) in order to try and balance government spending against the shrinking tax base and revenue stream.
- The reduction in quality of government services in particular and quality of life in general drives more residents and businesses out of the area.
- Eventually, the expenses, costs and financial liabilities outstrip the reduced tax stream and bankruptcy occurs.
1)We have previously often discussed the many businesses that have moved and businesses out of Seattle, diminishing the tax base with each move. As we discussed above, this out migration is a very serious symptom of a city or state heading down a financial death spiral.
And it appears that the outward movement of city businesses in Seattle is not going to abate anytime soon:
- According to a recent survey conducted by the Downtown Seattle Association and the Seattle Metropolitan Chamber of Commerce, about half of the businesses in Seattle are considering moving or downsizing their business.
- 56% of those surveyed say the city business climate has gotten worse, 61% are pessimistic about the next 12 months, 47% considering moving jobs out of Seattle.
- 72% say the city’s taxes, fees, and business regulation burden are not competitive.
- Jamila Conley is the owner of WeRise Wine Bar in the city: “Now I understand why people go to Bellevue. You travel five miles over the water and your minimum wage drops, your insurance drops, your taxes drop and it’s just like, ‘oh I get it.’ I am Seattle ride or die, but it sure does look appealing.”
- She points out that wages due to one of the highest minimum wages in the country are going to rise again next year making it even harder for a small business to be profitable.
- Conley points out a reality that we have discussed many times before when politicians keep irrationally raising the minimum wage: the good news is you just got a raise, the bad news is that you no longer have a job since we cannot afford the higher wage rate: “I support all of that, but you can’t do that in a vacuum because all you’re doing is like, yeah, this person used to be able to have this job, but if the place they’re working can’t afford them anymore, how is this helping?”
- Conley went on to explain that she had to put up a security gate in front of her business to keep her employees safe.
- She often found homeless folks, drug addicts, and other shady characters hanging out at her front door.
- 64% of those polled said that taxes and public safety.crime were the main challenges to doing business in the city.
2)The Cato Institute recently completed a large study and analysis where they ranked states from an economic freedom perspective. They scored each state across a series of economic indicators and then compiled those indicators into a final rating.
The final comprehensive rating was interesting:
- States that we have discussed that are receiving many of the businesses and residents fleeing the bankruptcy trending cities and states are Texas and Florida, ranked as the 3rd and 9th best states from a freedom perspective.
- This isn't a surprise as people flee to places where they can keep as much of their hard earned wealth as possible since the more financial freedom you have the more personal freedom you have.
- Also, businesses and residents are fleeing Seattle and the state of Washington and moving to Idaho and Montana which ranked as the 2nd and 8th freest states in the country.
- However, the least free states, as analyzed by Cato, tell the best part of the story.
- We have long maintained that New Jersey, New York, California, and Illinois are the most likely state governments to go bankrupt.
- And they just happen to rank as the 46th, 47th, 48th, and 42nd worst states from a freedom perspective.
3)We have often talked about the inane tax proposal in California where state billionaires would face a one time 5% tax on their wealth, not their income. This would require many state billionaires to each fork over billions of dollars to a state government that has proven time and again that it is not a good steward of taxpayer wealth, wasting it on projects that never get completed, fraud schemes that rob government programs, or kickbacks to their political allies.
And no sane person believes that this is a “one time” tax.Once politicians get their hands on any new tax source they will almost always exploit it and expand it.
As a result, state billionaires are not stupid, many of them have already left the state, taking their wealth and current and future tax liabilities with them:
- Google co-founder, Larry Page, has moved to Florida to avoid an estimated $11 billion tax hit.
- Google co-founder, Sergey Brin, has moved to Florida to avoid an estimated $11 billion tax hit.
- Meta/Facebook founder, Mark Zuckerberg, has purchased a home in Florida and is threatening to move out of California.
- Paypal/Palantir founder, Peter Thiel, has moved to Florida to avoid the wealth tax estimated to be about $1.7 billion for him.
- Former Uber CEO, Travis Kalanick, has moved to Texas to avoid the wealth tax.
- Tech investor of Craft Ventures, David Sacks, has moved to Texas to avoid the wealth tax.
- Auto Finance billionaire, Don Hankey, has moved to Nevada to avoid the wealth tax estimated to be about $180 million.
Up to this point in time, we didn't have the data to estimate how much these other tax streams would be negatively affected. But a recent study and analysis from the Hoover Institute did just that:
This paper examines the revenue and migration impact of the 2026 California Billionaire Tax Act, a one-time 5 percent tax on the worldwide net worth of individuals exceeding $1 billion. Using data from the Forbes Billionaire List, news reports detailing the residential real estate holdings of California billionaires, and public announcements of billionaire departures from the state, we estimate the behavioral response and associated revenue loss to this new tax using several different methodologies. Even before accounting for reductions in other tax bases such as the income tax, we estimate that the Act will collect approximately $30 billion (range $28 to 36 billion), less than a third of the $100 billion projected by Galle et al. (2025). This range accounts for the publicly confirmed taxpayer migration that has already eliminated nearly 30 percent of the Act's wealth tax base, applies a litigation-survival discount to the remaining base, and is validated by the wealth tax base elasticity literature. We estimate that California's billionaires contribute $3.3–5.8 billion annually in state income taxes. The present value of permanently lost income tax collections from departures more than offsets the one-time wealth tax revenue, yielding a net present value of negative $38.9 billion. Across 100,000 simulated revenue and discount rate combinations, 85 percent of plausible outcomes produce a negative net present value of state revenues.
Thus, according to his extensive, professional and thorough analysis:
- This potential wealth tax will not deliver an extra $100 billion in tax revenue.
- In fact, the analysis estimates that only about one third of the expected $100 billion will be generated by the tax since many billionaires have already left the state, taking their potential wealth tax revenue with them.
- Given fewer billionaires to tax, the bottom line is that the wealth tax, if enacted, will not generate an additional $100 billion in tax revenue but will suppress the entire state government tax revenue stream by almost $39 billion.
Thus, as discussed above Seattle, New York, New Jersey, California, and Illinois still appear to still be in the running to become the next major city or first state government to go bankrupt as politicians in those government entities do not understand the relationship between freedom, over taxation and regulation, and elementary economic principles
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