Look to states for hope and change
The fiscal cliff and debt ceiling dramas, which have been commonplace throughout President Obama’s tenure in office, have made one thing clear for anyone keeping an eye on the federal government: the next 1450 days are not going to be good ones when it comes to fiscal policy, economic freedom, and preservation of liberty. Under Obama and a weak Republican House, spending restraint has gone out the window. And, with no spending restraint, talk of meaningful tax reform is pointless. Washington Post columnist, George Will, was spot on in summing up our fiscal mess a few weeks back when he said the problem in Washington was not a lack of consensus, but, rather, “a consensus that is broad,” supported by Republicans too, and aiming to promise people a “large, generous welfare state without paying for it.”
The “big government” consensus described by Will can make it seem like the future for liberty and sound economic policy is bleak. Indeed, the next decade of economic policy does seem bleak at the federal level. At the state level, though, a number of exciting changes are occurring, some of which will benefit particular states and, perhaps, shape the national conversation on appropriate, growth-enhancing tax and spending policy going forward.
North Carolina, for example, will take up legislation to eliminate some personal income taxes in the 2013 session. Scott Walker, the controversial governor in Wisconsin, is also planning on introducing proposals to cut income and property taxes in the Badger State. Under the leadership of Sam Brownback, the state of Kansas is hoping to go one step further by eliminating the state income tax. Lawmakers in Alabama, meanwhile, look like they will hold steady with tax policy in the 2013 session, which is a missed opportunity because other states are becoming more competitive while we stand pat.
The pro-growth tax proposals we will see in about a dozen states in 2013 are cause for optimism because they encourage business formation, help attract capital from other states, and create jobs. States committed to flatter, fairer taxes have proven to be more resilient since the Great Recession, and people continue to “vote with their feet” and exit states with high taxes in favor of states with lower rates.
According to a study by economists Arthur Laffer, Stephen Moore, and Jonathan Williams, the nine states with no personal income tax—states like Florida, Tennessee, Texas—had a population growth rate about twice as fast as the nine highest tax states from 1999 to 2009. The high tax states like California, New York, and New Jersey were stagnant when it came to employment growth, had slower income growth, and averaged personal income taxes near 10 percent.
States with no personal income tax have also managed to collect more in tax receipts than the states with high personal income tax rates. That’s because people respond to incentives: when lawmakers eliminate taxes and encourage people to come, the pie is growing and tax revenues increase; when lawmakers instead try to squeeze more from their citizens, the predictable effect of people heading elsewhere happens again and again.
The fact lawmakers in many more states are catching on to the trend in pro-growth tax reform is residents in the reforming states, good for citizens looking to relocate, and good for America. At minimum, it will lead to a bit more job creation and better finances. In a more ideal world, it would even lead to lawmakers in D.C. taking a page from state reformers and fixing the mess they’ve made of our federal tax code.
Scott Beaulier is Executive Director of the Manuel H. Johnson Center for Political Economy at Troy University.