Maryland and Michigan Committing Economic Suicide

The title is a bit of an exaggeration, but states that raise income tax rates are engaging in extremely foolish behavior because entrepreneurs, investors, and business owners will shift to states with lower tax rates. The Wall Street Journal opines against these self-destructive policies, noting that Maryland’s tax-increase orgy will finance new spending and penalize small business:

Governor Martin O’Malley has been undertaking something close to a tax-increase-a-day tour. In Ellicott City he proposed raising the sales tax to a rate of 6% from a nickel. The next day in suburban Baltimore he unveiled his plan to raise the top income tax rate to 6.5% from 4.75%. Last Wednesday in Landover he called for a doubling of the cigarette tax to $2 a pack. He has also endorsed a one percentage point hike in the state corporate income tax to 8%, new commercial real estate taxes, and a 12 cent hike in the gasoline tax to 35.5 cents a gallon. …

In all, Mr. O’Malley hopes to wrench $2 billion a year from Maryland workers – in the name of filling a $1.5 billion gap in the state’s $30 billion budget. The extra $500 million will finance new spending. … Mr. O’Malley’s income tax plan is consistent with the Democratic Party’s nationwide revival of its New Deal theme of the tax code as a tool for income redistribution. While nations over the globe move to flatter, simpler, pro-growth tax systems, the Governor is selling his proposal as a pain-free whack at the rich. Trouble is, there aren’t enough truly rich to finance his spending goals, so his real target is the not-so-upper middle class. His two new tax brackets of 6% and 6.5% will kick in at incomes of $200,000 and $500,000, respectively, for couples. …

The Governor also fails to mention that about two-thirds of the people he wants to hammer are small business owners – the major employers in the state. He might acquaint himself with a new study by Barry Poulson of the University of Colorado which finds that states with either no income tax, or low flat-rate structures, have significantly higher income growth rates than states with steeply progressive tax rates. … The losers will be Maryland citizens, unless they move to another state, which we’d guess some of them will.

The WSJ also explains that Michigan’s tax increase is going to undermine a state that already suffers from a weak economy and a punitive tax regime:

At about 2 a.m. Monday, a handful of Republicans in the Legislature broke days of gridlock and handed Democratic Governor Jennifer Granholm the $1.48 billion tax increase she has been demanding. The state’s personal income tax will rise to 4.35% from 3.9%, and the rest of the revenue grab will come from a new 6% sales tax on business services. Already 14th in tax burden among the 50 states, according to the Tax Foundation, Michigan is now headed up in the rankings. Congratulations. …

By the way, last year Michigan introduced a new 4.95% business income tax, which will be applied on top of the sales tax. Last year, amid the national expansion, Michigan was the only state outside the Gulf Coast to lose jobs and see a decline in economic output. Comerica Bank recently moved its headquarters to Texas, in part because of Michigan’s hostile business climate. Michigan’s 7.4% jobless rate is the highest of all states and far above the 4.6% national rate. …

In the past 25 years, the only period when Michigan’s growth has exceeded that of the national economy was in the mid-1990s after then-Governor John Engler’s tax cutting and welfare reform. For a time, Michigan became the unlikely national leader in job creation. Now the total tax burden is returning to where it was before the Engler years. Michigan last went on a taxing binge in 1983, and voters were outraged enough to mount a successful recall campaign against two state Senate ringleaders. This time, two of three Michigan voters have told pollsters they want budget cuts, not new taxes. It may be that the only way to get jobs back into Michigan is to make sure the taxing politicians in Lansing lose theirs.

The only good news from Maryland and Michigan is that these states will serve as laboratories for economic failure. In upcoming years, public policy experts will compare their economic performance to the results in states – like Rhode Island and New Mexico – that have lowered tax rates. Needless to say, it is easy to predict that the states lowering tax rates will prosper relative to the states that are increasing the burden of government.