There's no agreement on the most important variable for state tax competitiveness.
- You could make a strong case that it is the overall share of income taken by politicians in the state.
- Or you could argue that the tax system for employers is the key metric.
- And the top tax rate obviously is an important measure of a state's economic attractiveness.
I'm sympathetic to the final option, in part because of my disdain for the income tax. And if an income tax is imposed, I prefer a simple and fair flat tax.
With that in mind, here's a fascinating infographic I received via email. I don't know if Reboot Illinois is left wing, right wing, or apolitical, but they did a very good job. I particularly like the map showing zero-income tax states (gray), flat tax states (red), and states with so-called progressive tax schemes (blue).
For what it's worth, Illinois taxpayers should fight as hard as possible to preserve the state's flat tax. If the politicians get the power to discriminate among income classes, it will just be a matter of time before all taxpayers are hit by higher rates.
Now let's shift to the spending side of the fiscal ledger.
Like any good libertarian, I generally focus on the size of government. I compare France with Hong Kong and that tells me that big is bad and small is good.
But regardless of whether a government is large or small, it's desirable if it spends money efficiently and generates some benefit. I shared, for instance, a fascinating study on "public sector efficiency" from the European Central Bank and was not surprised to see that nations with smaller public sectors got much more bang for the buck (with Singapore easily winning the prize for the most efficient government).
So I was very interested to see that WalletHub put together a report showing each state's "return on investment" based on how effectively it uses tax monies to achieve desirable outcomes for education, health, safety, economy, and infrastructure, and pollution.
I'm not completely comfortable with the methodology (is it a state government's fault if the population is more obese and therefore less healthy, for instance, and what about adjusting for demographic factors such as age and race?), but I nonetheless think the study is both useful and interesting.
Here are the best and worst states.
One thing that should stand out is that the best states are dominated by zero-income tax states and flat tax states.
The worst states, by contrast, tend to have punitive tax systems (Alaska is a bit of an outlier because it collects - and squanders - a lot of revenue from oil).
P.S. WalletHub put together some fascinating data on which cities get a good return on investment (i.e., bang for the back) for spending on police and education.
Every so often, I get asked why I'm so rigidly opposed to tax hikes in general and so vociferously against the imposition of new taxes in particular.
In part, my hostility is an ideological reflex. When pressed, though, I'll confess that there are situations - in theory - where more taxes might be acceptable.
But there's a giant gap between theory and reality. In the real world, I can't think of a single instance in which higher taxes led to a fiscally responsible outcome.
That's true on the national level. And it's also true at the state level.
Speaking of which, the Wall Street Journal is - to put it mildly - not very happy at the tax-aholic behavior of Connecticut politicians. Here's some of what was in a recent editorial.
The Census Bureau says Connecticut was one of six states that lost population in fiscal 2013-2014, and a Gallup poll in the second half of 2013 found that about half of Nutmeg Staters would migrate if they could. Now the Democrats who run the state want to drive the other half out too. That’s the best way to explain the frenzy by Governor Dannel Malloy and the legislature to raise taxes again... Mr. Malloy promised last year during his re-election campaign that he wouldn’t raise taxes, but that’s what he also said in 2010. In 2011 he signed a $2.6 billion tax hike promising that it would eliminate a budget deficit. Having won re-election he’s now back seeking another $650 million in tax hikes. But that’s not enough for the legislature, which has floated $1.5 billion in tax increases. Add a state-wide municipal sales tax that some lawmakers want, and the total could hit $2.1 billion over two years.
In other words, higher taxes in recent years have been used to fund more spending.
And now the politicians are hoping to play the same trick another time.
When I first started working on fiscal policy in the 1980s, I never thought I would consider Sweden any sort of role model.
It was the quintessential cradle-to-grave welfare state, much loved on the left as an example for America to follow.
But Sweden suffered a severe economic shock in the early 1990s and policy makers were forced to rethink big government.
They've since implemented some positive reforms in the area of fiscal policy, along with other changes to liberalize the economy.
I'm particularly impressed that Swedish leaders imposed some genuine fiscal restraint.
Here's a chart, based on IMF data, showing that the country enjoyed a nine-year period where the burden of government spending grew by an average of 1.9 percent per year.
From a libertarian perspective, that's obviously not very impressive, particularly since the public sector was consuming about two-thirds of economic output at the start of the period.
But by the standards of European politicians, 1.9 percent annual growth was relatively frugal.
And since Mitchell's Golden Rule merely requires that government grow slower than the private sector, Sweden did make progress.
Real progress. It turns out that a little bit of spending discipline can pay big dividends if it can be sustained for a few years.
This second chart shows that the overall burden of the public sector (left axis) fell dramatically, dropping from more than 67 percent of GDP to 52 percent of economic output.
By the way, the biggest amount of progress occurred between 1994 and 1998, when spending grew by just 0.27 percent per year. That's almost as good as what Germany achieved over a four-year period last decade.
My coauthor Jonathan Adler and I have been educating state lawmakers about how ObamaCare allows them to block the law’s employer mandate, and to exempt collectively 15 million taxpayers from its individual mandate. So far, 32 states have exercised those powers, exempting all of their employers and 10 million residents from those punitive taxes. In Mother Jones, MIT economics professor Jonathan Gruber calls our interpretation of the law “screwy…nutty…stupid.” (This issue is currently being litigated in Oklahoma.)
In this Cato video, I challenge Prof. Gruber (and any other supporter of the law) to a debate on the powers Congress grants states under ObamaCare.
Over the years, I've shared some outrageous examples of overpaid bureaucrats.
- The chief bureaucrat of a low-income California city getting almost $800,000 per year.
- Cops in Oakland getting average compensation of $188,000.
- A school superintendent in New York raking in more than $500,000 of annual compensation.
- A Philadelphia bureaucrat, after working only two and a half years, nailing down a guaranteed pension of $50,000 per year.
- A New York school bureaucrat simultaneously getting a $225,000 salary and $300,000 pension.
- California taxpayers being forced to pay a fired bureaucrat $550,000 for unused vacation time.
- An employee of the New Jersey Turnpike system raking in annual compensation of $320,000.
Hopefully we're all disgusted when insiders rig the system to rip off taxpayers. And I suspect you're not surprised to see that the worst example on that list comes from California, which is in a race with Illinois to see which state can become the Greece of America.
Well, the Golden State has a new über-bureaucrat. Here are some of the jaw-dropping details from a Bloomberg report.
The numbers are even larger in California, where a state psychiatrist was paid $822,000, a highway patrol officer collected $484,000 in pay and pension benefits and 17 employees got checks of more than $200,000 for unused vacation and leave. The best-paid staff in other states earned far less for the same work, according to the data.
Wow, $822,000 for a state psychiatrist. Not bad for government work. So what is Governor Jerry Brown doing to fix the mess? As you might expect, he's part of the problem.
...the state’s highest-paid employees make far more than comparable workers elsewhere in almost all job and wage categories, from public safety to health care, base pay to overtime. ...California has set a pattern of lax management, inefficient operations and out-of-control costs. ...In California, Governor Jerry Brown hasn’t curbed overtime expenses that lead the 12 largest states or limited payments for accumulated vacation time that allowed one employee to collect $609,000 at retirement in 2011. ...Last year, Brown waived a cap on accrued leave for prison guards while granting them additional paid days off. California’s liability for the unused leave of its state workers has more than doubled in eight years, to $3.9 billion in 2011, from $1.4 billion in 2003, according to the state’s annual financial reports. ...The per-worker costs of delivering services in California vastly exceed those even in New York, New Jersey, Illinois and Ohio.
Actually, it's not just that he's part of the problem. He's making things worse, having seduced voters into approving a ballot measure to dramatically increase the tax burden on the upper-income taxpayers.
I suppose the silver lining to that dark cloud is that many bureaucrats now rank as part of the top 1 percent, so they'll have to recycle some of their loot back to the political vultures in Sacramento.
But the biggest impact of the tax hike—as shown in the Ramirez cartoon—will be to accelerate the shift of entrepreneurs, investors, and small business owners to states that don't steal as much. Indeed, a study from the Manhattan Institute looks at the exodus to lower-tax states.
The data also reveal the motives that drive individuals and businesses to leave California. One of these, of course, is work. ...Taxation also appears to be a factor, especially as it contributes to the business climate and, in turn, jobs. Most of the destination states favored by Californians have lower taxes. States that have gained the most at California’s expense are rated as having better business climates. The data suggest that many cost drivers—taxes, regulations, the high price of housing and commercial real estate, costly electricity, union power, and high labor costs—are prompting businesses to locate outside California, thus helping to drive the exodus.
Yet another example of why tax competition is such an important force for economic liberalization. It punishes governments that are too greedy and gives taxpayers a chance to protect their property from the looter class.
The Government Accountability Office released Congressional testimony this week looking at Temporary Assistance for Needy Families. TANF, which replaced unrestricted welfare in 1996, has reduced welfare rolls and encouraged recipients to obtain work. Unfortunately, TANF’s goals have been undermined.
The GAO notes that “work participation rates … do not appear to be achieving the intended purpose of encouraging states to engage specified proportions of TANF adults in work activities.”
States are required to have at least 50 percent of eligible TANF recipients from single parent families participating in work activities. However, states are given various credits and exemptions that significantly reduce the number of recipients required to work. As a result, only about 30 percent of TANF recipients engage in “work activities,” which is often liberally defined. (This has been the case before and during the recession.)
Moreover, while TANF has successfully reduced the budgetary cost of cash-welfare, overall federal spending on anti-poverty programs has increased dramatically. According to a chart from Brian Riedl, anti-poverty spending has increased an inflation-adjusted 89 percent over the present decade:
I previously discussed how TANF enrollment has dropped since its passage in 1996 while food stamp enrollment has greatly increased. A food stamp user interviewed by the New York Times indicates one reason for the trend:
‘It used to be easier to go on cash assistance,’ she said as she left a food stamp office in Brooklyn this month. ‘You didn’t have to go to work, you didn’t have to report every day to an office and sign in and sign out. Now, if you don’t go to those group job meetings in the mornings, they shut down your whole welfare case. So that’s why I just get food stamps.’
Not surprisingly, the cost of the food stamps program has gone through the roof:
The desirability of federal anti-poverty programs in the midst of difficult economic times is a sensitive topic. However, with so many Americans currently in need of assistance, now is actually a good time to discuss the role of government in taking care of the less fortunate. As a Cato essay on welfare and Temporary Assistance for Needy Families argues, the federal government isn’t the best option.
You might recall several weeks back when Chester Finn, president of the Thomas B. Fordham Institute, called people like me "paranoid" for seeing federal money driving states to adopt national education standards as cause for serious concern that (a) the feds will take over schools' curricula, and (b) the new federal curriculum will be taken over by potent special interests like teachers' unions. (You know, the kinds of special interests that can get Democrats to give them $10 billion by cutting food stamps.) Well, in last week's Education Gadfly, Fordham published a piece by Eugenia Kemble, president of the union-dedicated Albert Shanker Institute, saying that national standards demand a national curriculum.
This interesting little happening -- Fordham publishing a piece by a union stalwart arguing that a national curriculum must go with national standards -- didn't go unnoticed by fellow paranoiac Greg Forster, who is now in a blog dispute with Kemble. It makes for telling reading, especially Kemble's rejoinder. It features an all-too-casual use of the charged term "balkanization" to seemingly describe anything not centralized, and utterly fails to mention federal funding when implying that the common standards push is state led and voluntary.
Unfortunately, Kemble mainly just sidesteps Forster's primary point: Fordham has provided yet more evidence that national standards funded by the feds will lead to a national curriculum that could very well be controlled by special interests. Heck, Fordham is in league with at least one component of the teachers' unions here, which is fine if they share the same goals. All Forster is trying to emphasize is that it is ridiculous to call people crazy when they simply point out what so much evidence seems to show.