Texas or "Tax Us" ?

"America is a land of taxation that was founded to avoid taxation"

Laurence Peter

This is an updated article I did a few years ago. I am doing this in honor of the new budget just released by our tax and spend Governor. I have update some of the facts I used before, but some might still be slightly outdated. Overall though, the facts used are still germane.

This is the story of America. In America, there were two kingdoms. One eshewed taxes, and the other embarrassed them. One large inhabitant of the kingdom that eschewed taxes was named Texas. The other kingdom had many spendy inhabitants, such as New York, California or Minnesota (just to name a few).

Recently someone who lives in Texas was asked how she was weathering the recession. She answered the question with a question - "What Recession?". Texas it seems, has dodged the bullet whereas many of the rest of us have not. To add insult to injury, Texas does not even have a state income tax. Finally, the unemployment rate in Texas is almost 2% behind the national average (6.1% compared to 7.8%).

Many "blue states" continue to struggle. In fact, many have unemployment rates either by state measures, or major city measures that are equal to or higher than the national average. The solution in most blue states is to become more like "tax us" than Texas. In other words, where Texas believed that a state tax would be regressive, California has a state tax which tops out at 13.3%. New York is close behind and trying to catch up.

How did we get this disparity between a state like Texas and many other progressive states in the union. Simple - all of us (but the most radical liberals) have learned a long time ago there is no such thing as a free lunch. In other words, someone always has to pay the bill, pick up the tab. States that are really in hot water such as California and New York, seemed to have forgotten that lesson. The solution always is to tax the producers and let more and more non-producers have a free ride. To quote a prominent politician in Washington, " When we have more people riding in the wagon than pulling the wagon, it is hard to go forward". The producers in high tax states understand what is going on - they are now voting with their feet. For example, recently California lost 10,000 millionaires to lower taxed states. Tiger Woods left to move to Florida, another no tax state. Phil Mickalson might be the next one to flee California. Simple math - the number of producers decreases, the number of non-producers increases and the net result in California has been a $16B deficit.

What I find the most interesting is this problem has become endemic - it is in most states as well as the Federal Government. Dr. Art Laffer who advised President Reagan as part of this Economic Team, has written and spoken out many times on how much taxes drag on the economy. There comes a point in diminishing returns when the marginal rate becomes so high that the producers simply stop producing. They either take their business elsewhere (out of the high tax state or even the country) or cash in. When taxes are low, productivity and innovation flourish; when they are high, the opposite occurs. This has been proven over and over throughout time.

When Minnesota had a very liberal senator years ago, the standing joke was, "Don't worry, the good news is we are only going to tax the rich. The bad news is that you are rich". If we cannot control the appetite of government, once the producers start to disappear, then the unsustainable tax burden will fall on each of us. And that will be the beginning of the end for prosperity in America.