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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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Comments (17)

Nimrodicus did not even hav... (Below threshold)

Nimrodicus did not even have to sell the stimuli package.. The Obamabots including fledgling ass kissers like Specter bought it sight unseen.

"President Obama and the De... (Below threshold)

"President Obama and the Democrats in Congress are on a collision course..."

Damned right they are, and they're going to get economic reality shoved right up there where the sun don't shine. But I'm sure Barney Frank will have something inspirational to say, like "Let's roll the dice again".

"Tax payers obviously can't... (Below threshold)

"Tax payers obviously can't use moving vans to avoid higher federal taxes"

It may be hard to do in large numbers but many wealthy business and people move their wealth overseas. That is one reason Obama wants to go after offshore tax havens but he chasing his tails. Just look at the GM jobs that are heading overseas.

I just left NJ. I have the... (Below threshold)

I just left NJ. I have the exact same job, at the same job location, but my income taxes have gone down. My new house is worth 4 times as much, and is 3-4x larger, but the property tax has only gone up about 10%. My car insurance, with full tort, has been cut by nearly half. My school district is better by every measure but one (kids can't walk to school).
All for crossing the border into PA. And PA isn't a state you'd normally consider cheap and with little government intervention in your day to day life... just try to get your tags transfered and car inspected!
And no, I am not trying to out Hooson anyone by pointing out I have a big(ger) house.

bryanD - "Which brings ... (Below threshold)

bryanD - "Which brings me to this WSJ piece, the umpteenth re-issuing of Laffer's banal thesis-in-a-can. It's not untrue, but it's filler material."

So, you are very critical of Laffer's Thesis, ok.

But immediately preceding that is this para:

My brother-in-law makes decent money writing term papers for college kids. It pays the bills and the beauty part is, after 10 years in business, rare is the subject that can't be summoned from his archives in final form.
So obviously your brother-in-law also deals in "banal thesis-in-a-can," and "filler material."

Not to mention he's doing something those that partake of his "service" will receive a failing grade for, or worst expelled, if caught using them.

bryanD, you truly are a 5 watt bulb operating in a 300 watt society.

As a resident of a "low tax... (Below threshold)
SER Author Profile Page:

As a resident of a "low tax state," Texas, I would like to offer my welcome to all small business owners from California and New York. In addition, all residents of other states who believe in liberty and small government, please come to Texas - we want you. However, you "big government" types can stay in your states and continue to make them the paradises you want.

I may not move out of Illin... (Below threshold)

I may not move out of Illinois, but I still find way to make my own small protest. I simply stopped spending money in Cook County.

I will not carry a roll of quarters just so I can park at a Chicago parking meter for two hours - 28 quarters required. I quit smoking two years ago out of sheer spite - I refuse to pay $95.00 a carton for cigarettes (Did I modify my behavior out of respect for the public good, or did I quit with my middle finger in the air? You decide). I go out of my way to make all my taxable business purchases - $5,000 a month or more, or $500 in tax revenue - outside of Cook County. I avoid driving into the city, with its Kamikaze photo-enforcement intersections, I stopped buying gas, clothing, food, and virtually everything else outside of the county.

The only way to win is to vote with your feet, and I've got a lot of company. Screw Cook County. Expect to see the State of Illinois standing in line with California and New York for a pull at the Federal teat.

Our state and local politicians just keep flailing at one contrived crisis after another, never running out of reasons to spend somebody else's money, and never ever really solving ANYTHING.

Screw Cook County. I like the sound of that.

"As a resident of a "low... (Below threshold)

"As a resident of a "low tax state," Texas, I would like to offer my welcome to all small business owners from California and New York. In addition, all residents of other states who believe in liberty and small government, please come to Texas - we want you. However, you "big government" types can stay in your states and continue to make them the paradises you want."

Be careful what you're asking. We've got a ton of transplants from the NE who left to escape the taxes and what do they do? Vote for more tax and spend politicians. They're so giddy with delight over not being taxed to death, they never make that connection between voting habits and taxes. Every time they pull that lever they might as well pack another box for the next move.

# 6 and # 8, isn't that wha... (Below threshold)

# 6 and # 8, isn't that what Austin is for?

But what happens when ALL t... (Below threshold)

But what happens when ALL the states are high tax states?

You may scoff, but...

The high tax states are Democratic-controlled states. Democrats control Congress. Congress passes the equivalent of a reverse of a sports 'luxury tax' (teams that spend too much have to kick in extra money that goes to poor teams) where residents of states with low state taxes have to pay higher federal taxes with that money being paid out to high tax states. (the rationale being that low tax states are benefiting unfairly at the expense of high tax states and thus the new tax is needed to compensate for the imbalance).

"But what happens when A... (Below threshold)

"But what happens when ALL the states are high tax states?"

I think there will always be states which see the skinning of businesses through excessive taxation as counterproductive. To use an old analogy, you can shear a sheep many times but you can only skin him once - and as California and the like are finding out, businesses don't want to stay when they feel they've been skinned.

As a resident of a "low ... (Below threshold)

As a resident of a "low tax state," Texas, I would like to offer my welcome to all small business owners from California and New York. In addition, all residents of other states who believe in liberty and small government, please come to Texas - we want you. However, you "big government" types can stay in your states and continue to make them the paradises you want.

As was said earlier, please be careful when inviting all these people from idiotic, high tax places, such as California and the Northeast, they have done all they can to ruin their states and refuse to stay and fight to take them back.

Look at what has happened to Iowa as ppl from Illinois flooded it for a better/cheaper way of life, of course they brought their political ideas and Iowa is now becoming corrupted and taxes are inching higher. At my place of work here in Texas we have several ppl that have re-located here from Conn. During the last election cycle they made sure to include, quite snidly, how ignorant we "Rednecks" here in Texas are and of course the fact we don't support The One means were still stuck in a Civil War mentality.

After a couple weeks of this we, very politely, questioned why they ran South like scared yellow dogs, if they were so superior in their political outlooks why is it their region is falling apart? We did remind them that they could return home but the fact our state is doing so much better than theirs is obvious proof that our "Redneck" ways may be better than theirs.

So if your going to come here, please leave your liberal ideology at the border. You've destroyed your states, you refuse to fight for change and then expect us to mold our beliefs to fit your world view...thanks but no thanks

The only people who like hi... (Below threshold)

The only people who like higher taxes (outside of politicians) are the people who don't pay any taxes and want the rest of us to support them with EVERYTHING by raising taxes on us. They think because they are the "misfortunates" and the rest of us the "blessed" that we OWN it to them...EVEN if they are not citizens of this country.
But sooner or later the money runs out..then what.

It's a nice story the WSJ i... (Below threshold)

It's a nice story the WSJ is telling here. But have any of you actually looked at the numbers behind their claims? When they say that the no-income-tax states 'had 32% faster personal income growth" than the high-tax states, they're juicing the numbers in several ways. First, they're equally weighting all the states in each group, so that Wyoming is as important as Texas (even though, population-wise, you could fit 45 Wyomings in Texas). Second, they're using total income instead of per-capita income as their measure of growth-- but that conflates two different variables, population and income.

If you use per capita income, and weight the states according to population, "32% faster" becomes "3% faster." Specifically, you have ten-year growth rates of 55% and 52% for no-tax and high-tax states, respectively. That's a 3% difference over ten years, which on an annual basis rounds to about zero.

To go even further, if you think that GSP (Gross State Product, the overall size of the economy) is the right measure of economic well-being, and look at the same states, the result actually reverses itself-- the high-tax states grow faster over this period.

Finally, their choice of "high tax states is totally cooked. Maryland is included in the "high tax states" category because they hiked their state and local tax rates in the fall of 2007. The hikes didn't even take effect until 1/1/2008, which of course is AFTER the period they're making claims about. Without these hikes, the top rate in MD was a lot lower-- low enough that they can't be considered a "high tax" state by this measure, unless you want to assert that in the ten years between 1997 and 2007 Maryland's economic growth was depressed by forward-thinking Marylanders who knew that ten years later the income tax would be increased, and immediately moved to Florida in anticipation of that. Anyone want to assert that with a straight face?

To be clear, the fact that I'm saying these data can easily (and justifiably) be interpreted to show the opposite conclusion of what the WSJ is trumpeting should NOT be understood as a claim that "high tax states have healthier economies." I wouldn't argue that, because you simply can't prove it. The economic analysis is simply too shabby to demonstrate a relationship either way.

If you're going to argue that you don't need an economic analysis to tell you what's obvious, then say so. But you shouldn't lean on the WSJ report as evidence for your claims-- it just doesn't withstand scrutiny.

If any readers are interested in seeing a spreadsheet with the underlying data that the WSJ is discussing (with the alternative results I'm discussing here), just email me at [email protected] and I will happily send it to you.

You can fisk just about any... (Below threshold)

You can fisk just about any public report. I bet you can prove statistically that Germany won World War II, or, even more incredibly, that the Obama Administration will actually run a surplus in 5 years.

I can tell you with 100.00% statistical certainty which finger I'm holding up in the general direction of Cook County.

Analyze it all you want, Wi... (Below threshold)

Analyze it all you want, Wilbur - but you'd better take into account what's actually happening.

Are businesses moving into high-tax areas, or low-tax? Are people moving from places where the taxes are high to where taxes are low?

That's the questions that are important - not ruminations on the whichness of the why about comparing Wyoming to Texas. Reality is key - analysis isn't. The WSJ is observing and theorizing about what they're observing and trying to make sense of it from a financial standpoint, and that's about it.

Sorry if it doesn't fit your template - but... that's reality for ya.

Bobdog, and jlawson, thanks... (Below threshold)

Bobdog, and jlawson, thanks for the reactions.

Bobdog, I think it would actually be pretty difficult to find statistics showing that Germany won World War 2, but you make a good point-- one which is pretty identical to the one I was trying to make. It's really quite easy to "prove" that high tax rates cause economic decline, as the WSJ did, but equally easy to show that they don't (as I did, every bit as rigorously). But either way, it's not science. It's just looking for ways to arrange the numbers to prove your preconceived position.
Which brings me to jlawson's comment: "reality is key--analysis isn't." You're half right, but you lose the train of thought here. We do know what's happening-- some places are gaining population, while others are losing it. That's reality. But we certainly don't know why. Some move for the weather, some for better schools, and yes, some for low taxes. Which reason dominates, we don't know.
When you assert that the patterns we see are not just because of taxes, but because of one particular measure of taxes-- the top marginal income tax rate--as the WSJ has done, that's not "reality," that's "analysis."
And my point is that it's very shoddy analysis.
To reiterate: "reality" is population shifts. "Analysis" is asserting that you know what's driving these shifts. If you think you know, you should have to prove it, and the WSJ clearly does not.






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