Let's put a stake in the heart of "High taxes kill states"

As the legislature moves toward the start of the session, we can count on a reawakening of the argument that high taxes kill state economies. Here's an example from St. Cloud blogger Gary Gross quoting the ever-unreliable political analyst Dick Morris:

High taxes kill states. There can be no better evidence than the 2010 Census. The states that lost House seats, because they’re shrinking, relative to the nation, had taxes 27 percent higher than the ones that gained seats.

Of the seven states that don’t have a personal income tax, four (Texas, Florida, Nevada and Washington) account for eight of the 12 seats apportioned to the fastest-growing states.

Without any proof, Morris pulls up the same old canard: "People vote with their feet and flee to low-tax states. It’s not the climate; it’s the taxes."

Climate

 How is Morris so sure? After all, the tax differential he cites is only 27 percent, while the average January temperature difference between New York City and major cities in the comparison states is substantially greater. Expressed as a percentage, the average in the coldest comparison city — Seattle (40.9°) — is more than three times warmer than the Minneapolis/St. Paul average (13.1°). Vero Beach, Florida, is almost five times warmer.

Note that in dollars, that average tax difference between states that gained and states that lost population is less than $500 a year. Hmmm. Given Vero Beach is 50°warmer than where I winter, I might decide to move even if I paid more in taxes.

So much for fun with averages. Morris's weak tax differential argument is undercut by much more than the dramatic temperature differential.

 

Immigration and migration

Morris also makes the claim that New York City's population is (un)naturally bolstered by immigration, saying that high taxes drive people out of upstate New York, but not the city. Could it be that culture, infrastucture, innovation, capital availability and other factors weigh in those decisions to move to a high tax place? Should we discount immigration's impact on population change in New York, but not in the high-immigration states of Florida or Texas?

The Brookings Institution analysis of the Census shows the problem with drawing conclusions about migration by comparing the 2000 Census numbers to 2010. Those low-tax states that also posted population gains did most of it in the early part of the decade during the cheap housing orgy. If taxes were what mattered, why wouldn't the low tax states continue to see gains?

The most dramatic migration turnaround story is the decline of Florida as the nation’s pre-eminent migration magnet. Florida led all states in domestic migration for each of the first five years of this decade, falling to 2nd in 2005-06, 15th in 2006-7, and down to 44th and 45th respectively in each of the last two years — during which it lost more migrants than it gained, for the first time in recent history.

By all kinds of indicators, those states (Texas excepted) are doing much worse now than they were in the middle of the decade. Population gain is still a concern, but overall, Minnesota has fared better than the low-tax states.

Income

Morris and Gross also ignore differences in income and what that might tell us about the populations in the states being compared. Using data available from the Census website, I compared some of those states mentioned, looking at household income [Download], average disposable income [Download] and distribution of income at the top and bottom of the scale [Download].

For example, if we are worried about people leaving the state, shouldn't we look at income as well as tax burden? As you can see, those high-tax states New York and Minnesota are well above average in after-tax income. Minnesota also has a higher proportion of those supposedly mobile high income earners than do the low-tax-magnet states. And we have lower overall proportion of low income earners.

There are lots of problems with the "taxes make people walk" scenario — even before we get into the differences in government services and qaulity of life indicators.

Guess which state has the lowest high school attainment in the nation? Texas.

Low taxes don't necessarily attract a higher proportion of high earners, but they clearly have a price.

— Charlie Quimby

Comments

[Herbert]

Thanks for the fine article...I'll use it with my greedy right wing Christian associates and friends.
P.S. Not all Christians are greedy but, the ones I know sure do enjoy their inherited wealth.

[Mike Sullivan]

I am sure that it not being suggested that there is no relationship between taxes and economic activity. Similarly I am sure that we'd all agree that if taxes were 100%, then that would have an influence. If that is the case, then the question is of ‘to what degree’ do taxes hinder net-positive economic activity.

I do not have the answer, and am not opposed to Morris' perspective in trying to understand that. I do agree with the antecedent in the canard that "People vote with their feet." But am uncertain about the second point "...and flee to low-tax states. It’s not the climate; it’s the taxes."

That said, I would find it difficult to put a stake in the heart of "High taxes kill states" And I am reasonably certain that our new governor has not created a convincing case that he knows as well when too much taxation hinders net-positive economic growth. In the absence of that guidance, I am going to be defensive and suspicious.

[Charlie Quimby]

Mike,

If you want better guidance than Arthur Laffer or Dick Morris offer, we've written about the taxes/growth relationship in some depth:
http://www.growthandjustice.org/22Oct2010.html
http://www.growthandjustice.org/Media_By_fourth_tier.html

As well as in summary:

http://growthandjustice.typepad.com/my_weblog/2010/09/tax-cuts-for-business-.html

The key points:

• Political rhetoric inflates state disparities. Differences in economic activity among states that appear associated with taxes are likely to be small.

• Study findings leave room for interpretation, so take claims with a grain of salt; take big claims with a tablespoon.

• How states balance taxes and spending matters. I.e., certain kinds of spending more than offset higher taxes.

• Tax cuts are overrated.

[Sully]

I read the piece “Taxes count, but their effects are complicated” in the paper in October—and thought it was well written. I re-read it again on your suggestion. It comprehensively addresses some matters, but I continue to struggle with what I blogged. I do agree with many of the conclusion in your analysis: create a “tax base as broad as possible so as to keep the marginal rates as low as possible”, but the underlying concern I have is what is the rate for which we should be taxing folks. You said it better than I that there is “ambiguity around how the state might best balance its budget with the least negative impact on economic performance.” So, the question is how much? That number/rate/% isn’t posited. And as I expressed, I am concerned that the new governor doesn’t know either. I can’t blame him, but I am certainly going to continue to be suspicious and defensive about taxes in the absence that argument. States/counties/municipalities are on the verge of bankruptcy. CA? IL? I question the leadership. Has anyone been to Chicago lately? And it may be that Morris is correct in that perception=reality and that folks are voting with their feet.

So, not arguing with you on 1) the data or 2) the ambiguity. I am suggesting that no one has knocked me over the head with a convincing that they truly understand the implications of raising the income tax.

Apologize if I haven’t reviewed this forum’s complete body of literature—though I made a good-faith effort. Good stuff and thank you for letting me speak.

Mike