The papers are filled with stories about the financial crises facing most states. How can they meet the requirements of their citizens, balance the budget and reduce debt, especially the unfunded liability for public pension funds and health care for public servants and others.
Of course, the solution to the budget and debt crisis is to increase taxes. Thankfully, the Congress extended, temporarily, the “Bush tax cuts.” It seems that almost everyone agreed that raising taxes in a fragile economy made no sense. Nonetheless, at both the state and federal level, increased taxes are on the table.
Albert Einstein said that insanity is doing the same thing over and over again and expecting different results. If this is true, California, Ohio, Oregon and New York, to name a few, are insane. Why is that? Simple. Each has multiple experiences in raising taxes to increase revenues and in each instance, revenues have decreased. Oh well, let’s try again.
Arthur Laffer has pointed out that “it shouldn’t surprise anyone that the nine states without an income tax are growing far faster and attracting more people than are the nine states with the highest income tax rates.” We should listen to Mr. Laffer. Oregon, however, did not. In 2009, Oregon raised the income tax rate on families making between $250,000 and $500,000 to 10.8%. On those making more than $500,000, the rate went to 11%. Everyone sat back and waited for the money to roll in. Woops! The tax revenue was to be more than the $180 Million Oregon received the year before. Instead, the revenues went down, dramatically to $130 Million. Due to the timing of the tax, the results could be much worse. Where did the money go? Well, the top income earners left the state and took their money with them. They probably will not come back. Undeterred, Maryland jacked the taxes on millionaires and watched as a third of them left Maryland. Any lessons learned?
Probably not. How about California. First, California has a personal income tax of 10.3%, a corporate tax of 8.8% and the highest capital gains tax in the country. Wow. The revenues must be flooding in. Not actually and it gets worse. Last year California lost 112,000 jobs. They have managed to rank last on the Chief Executive magazine of the best places to do business. Is there a correlation? Do ya think?
If that does not drive a stake in the “lets tax the rich” proposals, let’s look at where others do things differently. Unlike California, Texas has no personal income tax. Unlike California, Texas has a gross receipts tax of 1%. Not surprisingly, Texas has no capital gains tax. One would assume that the limited tax revenues for Texas are placing unsustainable burdens on the state. Not really. The same Chief Executive magazine ranked Texas at the top of the list of the best places to do business. One result was that last year, Texas saw an increase of 129,000 new jobs.
The same lesson can be found in the other states that do not have personal income taxes and treat business as a valuable asset.
Well, if increased taxes are not the answer, what is? Unfortunately, the states cannot monetize their debt by printing money. With financial burdens facing the federal government and the hostility of the people toward bail-outs, it is unlikely that the states can rely on the federal government for salvation. The solution is in cuts, significant cuts in spending. All programs must be reviewed to determine where cuts can be made and have the least impact on the citizens of the state. In many states, the costs of pensions, generally defined benefit programs and health care for public workers are unsustainable costs. Something must be done to revise the agreements to provide salaries, pensions, and health care to be more like those employed in the private sector. 401K programs work, defined benefit programs do not. There is no time to waste. The cost of borrowing to cover costs becomes more expensive each year and is also unsustainable. Soon there will be no way out, certainly not through raising taxes.
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