NATIONAL REVIEW ONLINE
May 30, 2014 4:00 AM
The New War Between the States
As businesses and residents vote with their feet, low-tax states like Texas are winning.
By John Fund
Wealth and people are moving in America, from places where local policies inhibit economic growth to places where the tax and regulatory climate is sunnier.
The numbers are clear. Between 1995 and 2010 over $2 trillion in adjusted gross income moved between the states. That’s the equivalent of the GDP of California, the ninth largest GDP in the world. Some of the movement might be due to weather — that helps to explain some of Florida’s $86.4 billion gain and New York’s $58.6 billion loss. But we can attribute a great deal to the fact that capital flows to where it is best treated. Travis Brown, author of the new book How Money Walks, reports that the nine states without a personal income tax gained $146 billion in new wealth while the nine states with the highest income tax rates lost $107 billion.
States are now competing for wealth transfers like never before. In New Jersey, Governor Chris Christie used a recent Wall Street Journal forum to slam neighboring New York as going in the “wrong direction” and to urge residents of the Empire State to move to his home turf. “You see taxes being increased there,” Christie told the audience of CEOs. “You have a new mayor in New York who is aggressively talking about increasing taxes in New York City. While I feel badly for New Yorkers, come to New Jersey.”
Nor is Christie alone. Tom Foley, a GOP candidate for governor in Connecticut, used the November 2013 election of the ardent “progressive” Bill de Blasio as New York mayor to run TV ads urging people to relocate. “Hey, New York City, with your new mayor, I know many of you are thinking about leaving,” Foley says in one commercial. “Connecticut next year will probably elect a new governor. When it does, Connecticut once again will be the place people want to be in the Northeast.”
Of course, most New Yorkers who will move homes or businesses will leapfrog their neighboring states, which are still much more highly taxed and anti-business than those in the South and West. The Census Bureau reports that Raleigh, Austin, Las Vegas, Orlando, Charlotte, Phoenix, Houston, San Antonio, and Dallas were among the ten fastest-growing metro areas last year.
Metro areas that lost the most population included Cleveland, Detroit, Buffalo, Providence, and Rochester, all firmly under the control of liberal politicians. Indeed, America’s major cities are turning more Democratic than ever. Take Texas, where every statewide officeholder is Republican but all the major cities from Dallas to Houston to San Antonio have Democratic mayors.
But even cities with liberal leadership benefit from statewide policies that increase incentives for job creation. Many states have right-to-work laws that make it illegal to require workers to join a union and pay dues — dues that overwhelmingly fuel the election of liberal politicians. Right-to-work laws are a powerful business-recruiting tool — so much so that even traditionally pro-union Midwestern states such as Michigan and Indiana have recently adopted them. By contrast, many states where unions hold sway are passing super-minimum-wage laws that price low-income workers out of the job market.
Union-dominated states are sinking further into economic stagnation as Democratic politicians increasingly dominate the local political climate. In 2012, California Democrats won a supermajority in both houses of the legislature and proceeded to accelerate a tax and spending spree that has been ongoing for two decades. For example, California now has the nation’s top state income-tax rate, at 13.3 percent.
Those kind of policies have consequences. The Manhattan Institute released a report in 2012 that found that since 1990, California had lost nearly 3.4 million residents to other states with lower tax rates. Over the last decade, an average of 225,000 residents left the state each year. The Manhattan Institute concluded:
States that have gained the most at California’s expense are rated as having better business climates. The data suggest that many cost drivers — taxes, regulations, the high price of housing and commercial real estate, costly electricity, union power and high labor costs — are prompting businesses to locate outside California, thus helping to drive the exodus.
The gulf separating growth-friendly states and “progressive” states is likely only to widen in the future. In a new report, the American Legislative Exchange Council notes that 18 states cut taxes within the last year and a half, but at the same time, slow-growth Illinois, Maryland, Connecticut, and Minnesota all raised their income taxes.
Economists Steve Moore and Art Laffer predict that within the next ten years, a half dozen Southern states will completely eliminate their income taxes. “This would mean that the region stretching from Florida through Texas and Louisiana could become a vast state income-tax-free zone,” they write. Florida, Texas, and Tennessee already have no income tax; and, spurred by their example, Republican governors in North Carolina and Louisiana are publicly proclaiming their goal is to join them. Other states are catching the fever. Kansas governor Sam Brownback vows to end his state’s income tax, and neighboring GOP governor Mary Fallin of Oklahoma says she wants to do the same.
The U.S. is swiftly becoming a tale of two nations. States that are following the Reagan model of low taxes and incentives are booming while states that are opting for the Obama model of wealth redistribution and European welfare-state economics are stagnating.
Some say the competition between them is unfair. “The blue states now have aging infrastructures, large pensions to pay, and entrenched trade unions,” Chicago businessman Kevin Gallagher told me. “The competitive advantage that most of the red states have is that they are a blank page and they don’t have the obligations the blue states have.”
True enough. But even states in a collectivist ditch have shown the ability to dig out of it. “They said we couldn’t reform a state that pioneered the Progressive Era’s policies and saw the nation’s largest public-employee union founded in Madison,” Wisconsin governor Scott Walker told me last month. “But we dared to try, and we succeeded. Now you can tell our reforms are working because our opponents refuse to pledge to roll them back. Any state can reform itself if the people decide they’ve had enough.”