Raising Taxes, The Best Method of Attracting Residents and Businesses
It sounds reasonable, right? I mean every good business person knows the best way to attract customers and make lots of money is to have the highest prices. What? That’s not right? As someone who’s actually run a business I learned the hard way that the store with the lowest prices sells the most product. That’s why often businesses get into this crazy race for the bottom and some businesses actually sell at a loss hoping to make up for it in high volume. But never have two businesses been in a race for the highest prices. Even in luxury items we rarely see this.
So why do people in government think raising taxes will attract business, keep residents, and solve their budgetary problems? Why don’t they promote business opportunities in their states with the idea that more businesses within their boundaries will result in more people employed and thus more people paying taxes? Oh, don’t look at me for the answer, I’m asking you. Really I’m asking elected officials since I know a good number have visited this blog and read it. Somehow, like Beck’s red telephone, I don’t expect to see a good response from a state official. But if I do I will post the reply in full.
You see, there is solid statistical and historical evidence that raising taxes does not increase taxes revenues. First, on the Federal level let’s look at the graph above. This is Hauser’s law, less a law than a historical graph. If you look up Hauser’s Law you’ll see the critics fault it for including SS taxes, so The Heritage Foundation did us the favor of removing all taxes except income taxes since income taxes are generally at the center of class warfare as well as governmental tax increase proposals. The general trend is that no matter what the top tax bracket is, the revenue (as a percentage of GDP,) remains roughly the same. As one blogger put some time ago, you simply “can’t soak the rich.”
Now let’s look at what happens to states who think they can continue raising taxes without any consequences. Yesterday, The Wall Street Journal reported that the state of New York has been bleeding people. Yes, since 2000 1.5 millions people, mostly from NYC, have fled the state and its ridiculous tax structure. In fact, 2004 recorded the highest taxes and the next year recorded the highest exodus. In 2006 the state watched $2.4 Billion in tax revenue flee the state, in spite of increased tax rates. Over the period 200-2008 the WSJ reports amounted to $30 Billion! Coincidence? I think not.
As people left others came to take their places, but there is something interesting to notice about this migration. The average income of those leaving New York was $93,264, while the average income of those migrating into the state was only $72,726. We can argue about why these people made less and likely there are multiple reasons for it. Partly, the reason is due to an influx of international immigrants and probably a larger reason is that higher paying jobs are being moved elsewhere to avoid the confiscatory tax structure of NY. The article cites the Empire Center’s study so I decided to wander over there and take a look.
The Empire Center provided a very interesting graph in their report. As mentioned earlier and confirmed in the report NY’s losses were offset by foreign immigrants likely taking lower paying jobs. The Center blames the outflow primarily on retirees and normal migration patterns, but I want to explore the possibility that there might be a tax connection.
Notice the states losing the most population are those known to have the highest state and local taxes. Other states topping the exodus list include, California, Illinois, Michigan, New Jersey, Ohio, Louisiana, Massachusetts, Connecticut, Maryland, and Kansas. Now that last one I can understand might be due to something other than taxes but I don’t want to go there.
What are the state taxes like in these states? These get pretty harried to figure out. States don’t have simple tax structures and taxes range on everything from sales, property, income, to “sin” taxes on cigarettes, booze, and in some cases junk food. Retirement Living‘s website has a comprehensive breakdown but I really wanted to look at aggregate taxes not have them broken down as they did here. Elsewhere on their site I discovered a list that sums things up much better. Here is a list of the top 10 tax-heavy states and their rank on the exodus Chart above. (I know DC is not a state but it is included in both reports.)
Notice that six of the highest taxing states also have the highest number of people leaving the state and all are in the top 20 out of 51. Even Hawaii! You would at least expect people would tolerate higher taxes there if no where else in the nation. Now let’s us examine where these people are going and compare that to the tax burden and see if we are observing a trend that transcends “normal migration” as suggested by The Empire Center.
Again, notice that five of the states with the lowest tax burdens also experienced the highest population growth. I believe it is safe to assume the negative impacts of hurricane Katrina greatly contributed to Louisiana’s population decline. When we remove Louisiana from the chart we see that the only negative growth state was Alaska and yet it still ranks better than any of the states on the heavy tax-burden chart. A major contributing factor to the population loss in Alaska may well be the reduction in personal income as salaries there have declined 3.2%. I’d move too.
The relationship between a state’s tax-burden and it’s population growth seem clear. Population growth also impacts tax revenues. My final chart lists the states with the greatest declines in tax revenue. (SOURCE: The Nelson A. Rockefeller Institute of Government.)
States with the lowest tax-burdens tended to do better than states with heavy tax-burdens. Alaska being the most notable exception and we have already noted the income problem. The other big exception is Florida. Florida’s tax base is heavily dependent upon tourism. Poor economic times mean fewer tourist, that in-turn reduces tax revenues in this state. Arizona and Maryland escape me and they may well just be blips and anomalies.
Returning to the point, it is especially interesting that two of the states with the lowest tax burdens actually saw increases in their revenues. Meanwhile New York and California followed the predicted results. Admittedly, this is only a comparison of a single quarter and is limited to only two years. However, Q2 was just as interesting, but I’ll let you peruse the pdf file.