As always, our top state governments that we think are nearing bankruptcy include New York, New Jersey, Illinois, and California. Our top major cities we think are rapidly approaching bankruptcy include New York City, Chicago, Los Angeles, and San Francisco.
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.
Today’s discussion will be based on a recent analysis by the American Legislative Exchange Council (ALEC) that was published in its annual, ”Rich States, Poor States” publication. The ALEC looks at official IRS data to track how wealth is being redistributed and moving around the country by citizens.
Remember, as listed above, it is our contention that people and businesses are moving out of high tax, high business regulation, high cost of living and high crime states and cities to other areas in the country that offer a more economical and better quality of life. We have discussed many times on how many of the businesses moving around the country are some of the Fortune 500 giants of industry so it is a pretty much proven fact that bigger, wealthier companies are moving.
But what about our contention that individual citizens are also moving? Are these movers also the wealthier and better off families and individuals or are the less wealthy, the less well off citizens moving? Obviously, if a state or city is losing population like we have shown, it may not be as bad if the less wealthy are moving out since the impact on the tax base would not be as great. The ALEC analysis allows us to explore that concept.
1)The “Rich States, Poor States” methodology ranks all 50 states on their economic competitiveness using IRS data at the county level. Thus, the approach does not measure headcount moving around but how much Adjusted Gross Income (AGI), as reported on their IRS tax forms, is moving, i.e. are poorer people moving or richer people moving? They looked at all 2,135 counties across the country.
2)The analysis found results that are consistent with our past discussions: not only are people moving out of the states and cities listed above that are heading towards bankruptcy but they are taking billions of dollars of taxable income with them when they move.
3)Not surprising, the counties losing the most AGI are located mostly in the states listed above that are our top candidates to go bankrupt pretty soon:
- Cook County (home county of Chicago, one of our prime city candidates to go bankrupt) was the county that lost the most AGI in the analysis timeframe, $4.3 billion
- Right behind Cook County was Los Angeles County which lost almost as much in AGI as Cook County, $4.2 billion.
- In third place was New York County in New York City which lost over $2.5 billion,
- New York County was followed by two California counties, Santa Clara County and San Francisco county.
- Rounding out the top six losers of AGI was another NYC county, Queens County
- Two other counties, Alameda County in California and Bronx County in NYC also made
In total, New York placed three counties in the top 15 list of losers of AGI and California had four counties in the top 15 list.
4)Over half of the 15 counties across the country that were top AGI losers were in the three states we view as the most likely to go bankrupt as their tax base shrinks over time: Illinois, New York, and California. Thus, not only are people fleeing from these states they are taking billions and billions of taxable income with them.
5)The government watchdog organization, OpenTheBooks, looked at the data and had the following conclusion: “Income loss at this scale has real implications. Counties losing billions in AGI face shrinking tax bases, increased pressure on public services where they may be most needed and reduced long-term economic resilience.”
6)Their conclusion is perfectly consistent with what we have been discussing for the past year or so: certain cities and certain state governments are in a financial death spiral because of the path outlined above that drove tax paying businesses and residents to other areas. At some point, the tax stream will become too small to support an ever growing city or state government bureaucracy and the implosion into bankruptcy has to occur.
7) Conversely, where are all of these people moving to and taking their AGI with them? The ALEC analysis looked at the other end of the spectrum to answer that question:
- Eight out of the top 15 counties that gained the most AGI in the analysis period were in Florida with Palm Beach County in Florida the clear winner, gaining about $3 billion in AGI.- Texas was the second biggest winner with four of its counties making the top 15 AGI gainer list.
- One county each in Nevada, South Carolina, and Arizona rounded out the top 15 AGI gainers.
It is probably not a coincidence that Florida, Texas, and Nevada do not have a state income tax, allowing people to keep more of their hard earned income. Conversely, California has a state income tax that starts with the first dollar earned and by the time a single tax filer gets to $360,000 the state income tax marginal rate is already over 10%. The top rate is a whopping 13.3%. No wonder people are leaving the state for states that do not tax income.
But this is just the income tax factor. The Wallethub website looked at the TOTAL tax burden by state and found that our top state candidates to go bankrupt are high on the list of highest tax burdens:
New York has the second highest tax burden
Illinois has the sixth highest tax burden.
New Jersey has the eighth highest tax burden.
California has the eleventh highest tax burden.
Meanwhile, Florida has the fourth lightest total tax burden and
More proof data, more information that some cities
and states around the country
are in dire shape and in a financial death spiral.
Businesses leaving, taking jobs,
revenue, and economic juice with them.
Residents leaving, taking tax revenue and
economic buying power with them. It
is no longer a question of if, it is a
question of when and which city or state goes
bust first.
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If you agree that we need to deseat every member of Congress for their lack of success and accomplishment, then please consider going to the following petition link to help the cause:
https://www.change.org/p/deseat-congress-reset-freedom
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