Saturday, March 21, 2015

Vote With Your Feet

About two years ago, the Georgia legislature surprised a handful of Tennessee residents by resuscitating a decades-old dispute: some 30,000 Tennesseans, they said, were actually Georgians. The border between the two states, established in 1818, had been botched. It was supposed to run along the 35th parallel, the Georgia legislators argued, but in some places the border that exists today runs slightly to the south of that line.

Its easy to understand why the Georgians were looking to reclaim this small strip of land from Tennessee after almost two centuries: it would give their state access to the Tennessee River and the water rights that come with it--water Georgia legislators think they'll need as a result of the tremendous population growth in the past few decades.

The Tennesseans, however, quickly made clear they had no interest in becoming Georgians. Their hostility wasn’t to the state itself but to its tax policies. In Georgia, the income tax was 6 percent. In Tennessee, there was no income tax at all--zero. And at a time when incomes have been relatively stagnant, the Tennesseans didn't think the honor of becoming Georgians was an opportunity worth hundreds (or thousands) of dollars a year.

The Tennessee residents response to the prospect of paying income tax is anecdotal proof of a real phenomenon in the United States--one that historically has received far too little attention: to a surprising degree, Americans and the companies they work for are willing to choose what state they call home based on tax policy.

Indeed, the historical record shows that people vote with their feet. Whether directly (to benefit their own personal tax bills) or indirectly (to seek better job opportunities), for decades Americans have been leaving high tax states for low tax states. The result has been economic decline in the states with high income taxes and a surge of jobs and investment in states with low income taxes.

Former Texas Governor Rick Perry has been one of the leading elected officials to highlight the connection between states tax policies and the opportunities they create (or destroy) for their citizens. Governor Perry routinely points out that in the past 14 years, one third of all the net new jobs created in the United States have been created in Texas. This so-called Texas miracle is not really a mystery at all. For one thing, the state has no individual income tax. And in 2014 for the tenth year in a row, Chief Executive magazine ranked it best state in the country to do business, in large part because of its lower tax burden and lighter regulatory regime.

There’s no reason this miracle couldn’t be replicated by other states, too. In fact, a major new analysis published last year confirms that income tax is the single most important factor state legislatures can control in trying to improve their economic competitiveness.

In their book published last year, economists Art Laffer, Stephen Moore, Rex Sinquefield and Travis Brown demonstrate that the 11 states that adopted income taxes after 1960 have declined economically--many disastrously so--in relation to the 39 other states. In Michigan, for instance, gross domestic product declined 57 percent relative to the others.

That slump is reflected in population, as well, as people flee to lower taxes and the better job opportunities that come with them. In terms of population growth, the economists write, “each of the 11 states [that imposed an income tax after 1960] is in the bottom half of the U.S. rankings: nine are in the worst 13 states, and three are the worst three states.”

Where have all the people been going? Well, in large part they’ve been heading to the nine states without an income tax. Over the past 10 years, the economists find, the zero income tax states gained net 3.9 percent of their population solely due to interstate net in-migration. The nine states without an income tax grew at more than twice the rate, on average, as the nine states with the highest income taxes. The contrast in economic growth and jobs was similarly stark.

With results as clear as those Laffer, Moore and their coauthors document in The Wealth of States, you’d think more of our laboratories of democracy would be moving toward eliminating income taxes, the effects of which cause compounding damage over time.

This is just one of the reasons I was encouraged to see that Vince Haley, a candidate for Virginia Senate in Virginia’s 12th Senate District and a colleague with whom I’ve worked closely on policy for more than a decade, has called for phasing out Virginia's income tax--which would make it the 10th state in the nation with no income tax.

Vince argues that by controlling spending, Virginia will generate budget surpluses, which can then be applied to lowering income tax rates. Over time, this consistent budget restraint, and the increased growth that will occur due to lowering the income tax burden, will allow Virginia to phase out the income tax entirely.

All that’s required is to cap the growth in spending and put the surpluses that follow toward permanently eliminating the state’s income tax.

And it’s about time for Virginia to control its spending: the state budget has grown by almost 65% in the past ten years. One result has been a substantial collapse in the state’s economic competitiveness as scored by the Tax Foundation, from the 13th best business climate in 2007 into the bottom half--27th place--today.

The experience of states like Texas--along with the overwhelming evidence Laffer, Moore and their colleagues have assembled--suggests phasing out the income tax is the single greatest thing Virginia could do to create jobs, increase take-home pay, and encourage economic growth for the benefit of all Virginians. And not just Virginians: every state could learn from the experiences of Texas, Florida, New Hampshire and Tennessee, among others--and all Americans could benefit from lower taxes if their states followed the same model.

Your Friend,
Newt Gingrich

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