The Ghost Of California Proposition 13

Arthur Laffer and Stephen Moore have written a great opinion piece in today’s Wall Street Journal that serves as a reminder of what happens when state governments tax the “rich” to pay for profligate spending. They also share some data from a recent study they conducted for the American Legislative Exchange Council in a publication titled “Rich States, Poor States“. Noting that pols in states such as California, Connecticut, Delaware, Illinois, New Jersey and New York have pushed for increasing taxes on the “rich”, Laffer and Moore point out the obvious:

Here’s the problem for states that want to pry more money out of the wallets of rich people. It never works because people, investment capital and businesses are mobile: They can leave tax-unfriendly states and move to tax-friendly states.

They also found that the level of prosperity and general economic vitality was more prevalent in lower tax states:

We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts.

Did the greater prosperity in low-tax states happen by chance? Is it coincidence that the two highest tax-rate states in the nation, California and New York, have the biggest fiscal holes to repair? No. Dozens of academic studies — old and new — have found clear and irrefutable statistical evidence that high state and local taxes repel jobs and businesses.

Class envy and base political motives, as manifested in a steeply progressive tax code, are the root of bad fiscal policy. Laffer and Moore observe that there are consequences for this bad policy:

We believe there are three unintended consequences from states raising tax rates on the rich. First, some rich residents sell their homes and leave the state; second, those who stay in the state report less taxable income on their tax returns; and third, some rich people choose not to locate in a high-tax state. Since many rich people also tend to be successful business owners, jobs leave with them or they never arrive in the first place. This is why high income-tax states have such a tough time creating net new jobs for low-income residents and college graduates.

Tax payers obviously can’t use moving vans to avoid higher federal taxes. And the political leverage of moving jobs from a high tax state to a lower tax state has less effect on federal fiscal policy when a government can print money and borrow (short term) without serious consequences. However, the genesis of the Reagan era tax cuts were to be found in the Proposition 13 property tax revolt in California. It’s not unlikely that a similar tax revolt could be organized around the issue of job creation given the most recent unemployment data showing joblessness moving toward the 11% level.

President Obama and the Democrats in Congress are on a collision course with economic forces that are both immutable and impervious to the finesse and nuance that was used to sell the “stimulus” package, budget and other spending schemes on the Liberal Left menu.

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