The further to the left or the right you move, the more your lens on life distorts.

Wednesday, April 25, 2018

Tax Migration

In some cities and states across the country, the blue model of governance is in high gear. Taxes are rising at an alarming rate to support an ever-increasing public sector work force that is required hired to support an ever increasing number of low income people, who take advantage of an ever-increasing number of government programs that often correspond to an ever-increasing number of onerous local regulations that control everything from the quality of building construction (a good thing) to what kinds of food you can eat (an idiocy). And because blue politicians love the canard that tells us the "the rich don't pay their fair share," the majority, but not all, of those increasing taxes fall on upper-income people.

As I've noted many times in this blog, there's only one problem. Because high-income people often have the unique ability to vote with their feet (i.e., move to a more tax friendly state) blue cities and states are experiencing a net migration that will be ruinous if it continues.

Arthur B. Laffer and Stephen Moore write:
In the years to come, millions of people, thousands of businesses, and tens of billions of dollars of net income will flee high-tax blue states for low-tax red states. This migration has been happening for years. But the Trump tax bill’s cap on the deduction for state and local taxes, or SALT, will accelerate the pace. The losers will be most of the Northeast, along with California. The winners are likely to be states like Arizona, Nevada, Tennessee, Texas and Utah.

For years blue states have exported a third or more of their tax burden to residents of other states. In places like California, where the top income-tax rate exceeds 13%, that tax could be deducted on a federal return. Now that deduction for state and local taxes will be capped at $10,000 per family.

Consider what this means if you’re a high-income earner in Silicon Valley or Hollywood. The top tax rate that you actually pay just jumped from about 8.5% to 13%. Similar figures hold if you live in Manhattan, once New York City’s income tax is factored in. If you earn $10 million or more, your taxes might increase a whopping 50%.

About 90% of taxpayers are unaffected by the change. But high earners in places with hefty income taxes—not just California and New York, but also Minnesota and New Jersey—will bear more of the true cost of their state government. Also in big trouble are Connecticut and Illinois, where the overall state and local tax burden (especially property taxes) is so onerous that high-income residents will feel the burn now that they can’t deduct these costs on their federal returns. On the other side are nine states—including Florida, Nevada, Texas and Washington—that impose no tax at all on earned income.
Because "leaders" in blue cities and states tend to be ideologues (think: Mayor Bill deBlasio in NYC), they are incapable of admitting that a migration is occurring and even more blind to the long term effects on their cities and states.

In Connecticut, there's a story (possibly apocryphal) of a very high net worth individual from Greenwich who announced he was leaving Connecticut for a low tax state. His yearly tax bill was so high that his departure literally made a small, but noticeable dent in state revenues and had budgetary implications. Multiply that by hundreds of other high net worth individuals and companies, and blue states have a significant problem.

For those true believers who think this isn't happening, Laffer and Moore provide a few statistics:
Since 2007 Texas and Florida (with no income tax) have gained 1.4 million and 850,000 residents, respectively, from other states. California and New York have jointly lost more than 2.2 million residents. Our analysis of IRS data on tax returns shows that in the past three years alone, Texas and Florida have gained a net $50 billion in income and purchasing power from other states, while California and New York have surrendered a net $23 billion.
You'd think the media (say, um, 60 Minutes) might do an exposé on this instead of spending hours interviewing a sleazy porn star who is alleged to have had sex with Donald Trump over a decade ago. But no ... that won't happen because bringing tax migration to light just might make people begin to ask questions about the efficacy of the blue model and begin to wonder who will pay for it once the wealthy depart. The answer, of course, is one that the leaders of blue cities and states don't want middle class people to think about. It's them!

UPDATE (2/26/2018):

As if to punctuate my discussion of the blue model, the editors of the Wall Street Journal comment on one of its poster children—my ex home state, Connecticut:
The 50 American states have long competed for people and business, and the 2017 tax reform raises the stakes by limiting the state and local tax deduction on federal returns. The results of bad policy will be harder to disguise.

A case in point is Connecticut’s continuing economic decline, and now we have even more statistical evidence as a warning to other states. The federal Bureau of Economic Analysis recently rolled out its annual report on personal income growth in the 50 states, and for 2017 the Nutmeg State came in a miserable 44th.

The progressive paragon’s performance is even worse when you look at the details. The nearby chart shows that the state’s personal income grew at the slowest pace among all New England states, and not by a little. Governor Dannel Malloy’s eight-year experiment in public-union governance saw income grow by a meager 1.5% for the year, well below Vermont (2.1%). The state even trailed Maine (2.7%) and Rhode Island (2.4%), which are usually the New England laggards.
Connecticut exemplifies the blue governance model—ever-increasing taxes with the burden falling on the "the rich" and corporations, an excess of government employees, an underfunded pension system, and a governor and legislature that pushed the progressive model to the detriment of its citizens.

The WSJ editors continue:
In Mr. Malloy’s [the Democrat Governor of Connecticut] case this has included tax increases starting in 2011 and continuing year after year on individuals and corporations that eventually drove GE to move its headquarters to Massachusetts. Unfunded pension liabilities continue to grow in Hartford without reform, in contrast to Rhode Island, where Democratic Gov. Gina Raimondo has put public pensions on a more stable footing.

The personal income figure isn’t a macroeconomic abstraction. It is the measure of rising or falling living standards—whether someone can afford a new car, or a family vacation, or send the kids to summer camp.

The fact that Connecticut, which is next to America’s financial capital, has grown so poorly amid an expansion that was especially good for financial assets is a damning indictment of its political leadership. It is a particular tragedy for the state’s poorest citizens who may not be able to flee to other states that aren’t run by and for government employees. Maybe we should call it the Regressive State.
Some of this appears to be the gross incompetence of Connecticut's current governor, but the citizens of that state had an opportunity to unseat him is the last state election, but couldn't bring themselves to vote for a Republican candidate. CT is a beautiful state with ugly problems. It's really a shame that it can't get out of its own way.