Friday, December 29, 2017

People Still Move Away from Higher Taxes

The latest migration data, putting Wyoming dead last with the largest net loss of population, is yet another wake-up call for all the tax hikers around our state. They have not even had their Taxmageddon package enacted, and we are still hemorrhaging workers and taxpayers. 

In other states, the mere prospect of higher taxes can actually motivate even devout statists to rethink tax hikes. Or, in the words of the New York Daily News on December 11:
An across-the-board tax hike on millionaires sought by [New York] state Democrats will likely be off the table if President Trump’s tax bill passes in Washington, Assembly Speaker Carl Heastie told the Daily News. In New Jersey, legislative Democratic leaders have said they will put the brakes on Gov.-elect Phil Murphy’s proposal to hike taxes on millionaires because they feel the increase — coupled with a federal bill that is expected to severely restrict the deductibility of state and local taxes — could force wealthy Garden State residents to decamp for lower-tax states. “I do have that same concern (in New York),” Heastie (D-Bronx) said in an interview at his Capitol office. “It would be very difficult to ask those same people (who lose their federal deductions and could pay tens of thousands of more in taxes) to then pay an additional state income tax where that addition is not federally deductible.”
Since Wyoming does not (yet) have a personal income tax, we are technically not going to be affected by the change to state income tax deductions in the GOP tax reform. The property-tax part is a different story, of course, but the point here is not the impact of the tax reform. 

What matters here is how the changes to the state income taxes effectively work as a tax hike. The reaction in high-income tax states, where this change has a profound effect, is big enough to cause lawmakers - and even the newly elected governor of New Jersey - to actually think about tax competition. Here in Wyoming, there are a couple of components of the Taxmageddon package that directly affect our ability to compete as a state. At the top of the list are the increase in property taxes by means of higher assessment values (theoretically a 17-percent rise in the state share on industrial property, and more on private property) and the new sales tax on services. 

High property taxes immediately puts Wyoming at a disadvantage, but the problem is even bigger than that. With the new limits on property-tax deductions, a shift in our tax base, the GOP tax reform will will rapidly put us in a competitive disadvantage. The new cap on property tax deductions is de facto a disincentive toward reliance on property taxes as a tax base.

I am all in favor of a tax-base shift that alleviates the minerals industry of at least some of its government-funding burden. However, that cannot happen unless the tax-base reform comes with a substantial reduction in overall taxation. That, in turn, won't happen without substantial, structural spending reforms

New York and New Jersey are not the only states hurt by high taxes. Illinois, the nation's poster child for ridiculously big governments (now that California has been reduced to a fiscal punch line), is taking another $580 annually out of the pocket of every resident, thanks to this past summer's increase in the income tax. Back then, the Democrat-controlled Illinois state legislature
approved increasing the individual income rate from 3.75 percent to 4.95 percent, which works out to an additional $12 in state taxes for every $1,000 of income. Corporations will pay 7 percent instead of 5.25 percent. Both new percentages are permanent and retroactive to July 1, meaning any compensation received this month should be taxed at the higher rate. The changes were part of a $36 billion package the Democratic-controlled Legislature passed over opposition from GOP Gov. Bruce Rauner, who has called for various pro-business reforms. Rauner’s veto was overridden, giving Illinois its first budget in more than two years, a period during which more than $14.7 billion in overdue bills was amassed and various programs were threatened.
We can sit here in Wyoming and laugh at Illinois for being a liberal utopia. In the meantime, we are on the precipice of a $475-million tax hike. How pro-business is that? 

As a result of their continuous efforts at draining taxpayers for every cent they have, Illinois is on the demographic losing end. Neighboring Indiana takes every opportunity to convince more businesses and taxpayers to cross the state line:
The personal and corporate income tax rate increases enacted last week by the Democratic-controlled Illinois General Assembly — over the veto of Republican Gov. Bruce Rauner — could be a boon for Indiana. "We've had a lot of businesses from Illinois looking at Indiana in the past because of our business climate," said Abby Gras, spokeswoman for the Indiana Economic Development Corp., the state's commerce department. "We would expect that to continue as Indiana continues to focus on ensuring that we're a state that works for business."
According to the 2016 Census data on state migration, Indiana gained two residents from Illinois for every Indiana resident who moved the other way. 

Next week we are going to take a closer look at Wyoming's interstate migration flows; for now, let us note the anecdotal evidence that high taxes drive people out of a state. 

Let me also add that with the outbound migration we have seen in the last few years, we have seen a trend of rising poverty. The correlation is compelling and deserves a deeper look (also on the to-blog list); for now, let me make very clear that Taxmageddon would strongly reinforce both outbound migration and the growth in poverty.

Last but not least, it is important to warn about another tax trend that, unfortunately, too often falls on the back burner in the public discourse: local tax hikes. Often, the argument is made that a local tax hike is such a marginal event that nobody will notice. The problem is that many small creeks form a mighty river - and all of a sudden, a community is drained of so much money, thanks to many minuscule tax hikes, that its overall economic activity suffers. 

When that happens, the tax base is weakened, with the predictable result that less tax revenue comes in. Case in point from the Philadelphia Business Journal:
For the second time since Philadelphia implemented a tax on soda and other sweetened beverages, the city's beverage tax has yielded less than $6 million in monthly revenue. Based on preliminary figures provided by the city, soda tax revenue collections in the month of November generated $5.9 million. That's a drop from the $6.1 million collected in October and it's also slightly less than the final revenue figure reported in January ($5,931,239), until now the worst month financially for the tax. The January figure was still regarded positively since it exceeded estimates. ... Total PBT revenue collected so far, from January through November, is $72.3 million – which puts actual PBT dollars $19.7 million below the city's yearly estimate of $92 million with just one month to go.
Frankly, I have lost count of all the tax hikes I have seen where, once the tax goes into effect, revenue has come in below forecast. It is not hard to make the case why this happens: tax hikers usually avoid taking into account the negative multiplier effects of their tax hikes because it would mean they had to acknowledge that taxes are bad for businesses and families. What baffles me is how tax hikers can continue to get up in the morning without any moral qualms whatsoever over inaccurate forecasting and - eventually - political dishonesty.

As we go into 2018 and the most important legislative session in years, let us keep in mind that our state:
  • Is the most beautiful place in the world to live;
  • Has been bleeding residents for years;
  • Contrary to conventional wisdom, is not under-taxed; and
  • Under the $475-million Taxmageddon package would gradually but inevitably sink into industrial poverty and economic irrelevance. 

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