“States do not enact changes in a vacuum – every time they increase the cost of doing business in their state, their state brand immediately loses value.” –Jonathan Williams, director of the tax and fiscal policy task force for the American Legislative Exchange Council (ALEC)
So I talked with Jonathan Williams yesterday about the third edition of the American Legislative Exchange Council’s (ALEC) Rich States, Poor States report, which looks at how states are crafting tax policy to manage spending and debt levels as they try to survive in this lean fiscal times.
The concern of Williams (at right) and ALEC’s stable of economic experts is that many states are increasingly looking to raise taxes and fees across the board, instead of spending cuts, in order to shore up their balance sheets – and that ends up driving away both individuals and businesses alike, thus reducing the very tax base the states are counting on to pay the bills.
The twist to all of this, however, is that some states are NOT doing this – they’ve taken the time to restructure themselves so lower taxes, fees, spending, and debt are the order of day – and they are aggressively going out to bring in residents and businesses from outside their borders.
“There is a war going on between the states today for capital, business, and innovation,” Williams told me. “The fact is that states can’t build ‘Berlin walls’ around their borders. Also, businesses, individuals, and especially capital are all much more ‘mobile’ today, able to pick up and move far more easily than in the past.”
Simply put, ALEC’s research confirms a very basic theorem – states with a high and rising tax burden are more likely to drive away individuals and business, while those with lower and falling tax burdens are more likely to attract businesses and create jobs.
Truckers know this instinctively – especially those in California, dealing not only with higher taxes and fees, but much tougher and costlier regulations than anywhere else in the nation – that this is very true (witness the culmination today of the successful battel against Pennsylvania’s effort to collect tolls on I-80, chronicaled by Brian Straight in our news section).
And those higher taxes are driving many California truckers to leave the ‘golden state’ if they can. “Look at diesel fuel taxes alone – California has the highest, at 72 cents per gallon,” said Williams. “Our research shows that states with responsible spending and competitive tax rates enjoy the best economic outlook. By contrast, the correlation between poor policy and poor economic results is indisputable – just look at California, New Jersey, and New York.”
For example, New York lawmakers are trying to close a $9.2 billion deficit through spending cuts and big tax increases. New Jersey is in the midst of what its elected officials call an “extraordinary and unprecedented” tax revenue decline that could take until the second half of 2013 for the state’s financial situation to return to where it was in 2008, and as a result, taxes are climbing – $2.8 billion worth from property taxes alone.
This isn’t a new problem, by any means. According to a report last year by the Pew Center on the States – a division of The Pew Charitable Trusts – said six major factors that contribute to state budget issues: (1) loss of state revenues; (2) the relative size of budget gaps; (3) increasing joblessness; (4) high foreclosure rates; (5) legal obstacles to balanced budgets – specifically, a supermajority requirement for tax increases or budget bills and (6) poor money-management practices.
“Record-setting revenue drops, high unemployment and far-flung fallout from the housing bust and credit crisis; virtually all states have been stressed by the downturn,” said Susan Urahn, managing director for the Pew Center on the States, in that report.
“We expect that when state lawmakers next spring turn to crafting their new budgets for 2011, many will confront an even tougher set of challenges, as states already have made significant cuts, yet revenues continue to drop, and stimulus funds will be running out,” she added.
All in all, 49 out of the 50 states in the Union are experiencing budget problems this year, said ALEC’s Williams – a direct result of the global economic recession tied to the cumulative impact of tax and spending policies over the last few decades.
But it doesn’t need to be this way, he stressed. ALEC noted that there are five “top” states in its report conduct what the group calls “good” tax and budget policy: Utah, Colorado, Arizona, South Dakota, and Florida. Williams said Colorado offers a good example of how a state can “re-orient” its fiscal policies to attract – and keep – a healthy tax base.
“It took them a long time – it wasn’t an overnight process – to set the stage for growth,” he noted. “For 10 years Colorado lagged the nation until 1990, when they put in place a ‘taxpayer bill of rights’ that committed any surplus revenues to reducing the tax rate. As a result, their personal tax rates today are around 5% and their sales tax is at 2.9% – creating a favorable fiscal environment for businesses and individuals alike.”
Then there’s Florida – one of nine states without a personal income tax, which is a huge reason wealthy athletes from all over the U.S. (Tiger Woods, etc.) choose to live there. A recent example is the move by Tom Golisano, owner of the Buffalo Sabres hockey tream, who relocated from Rochester NY to sunny Florida due to escalating taxes. “He’s saving $13,000 a MONTH in personal income taxes as a result,” ALEC’s Williams said.
Does this mean states should do away with income taxes altogether? Hardly. But what ALEC’s and Pew’s reports highlight is that big changes need to be made in how state taxes and budgets are set. Many state governments also function under constitutional rules that their budgets must be balanced (a good one that, unfortunately, our national government lacks), which makes the fiscal balancing act all the trickier.
In the end, said Williams, this recession and the resulting fiscal havoc being wreaked upon the states should be taken as an opportunity to rethink everything top to bottom – what the critical priorities should be, what states (and their residents) can live without, and how budgets can be kept in check over the long term so disastrous deficits don’t rear their ugly head again.
“It’s about deciding whether to raise taxes or live within your means; it’s about rethinking all state spending; about finding more efficient ways to perform tasks; and about establishing themselves as solid ‘brands’ for attracting individuals, businesses, and capital in the future,” he noted.