High Taxes Drive People and Jobs Out of States

Published March 1, 2008

Just as nations compete economically, so do the individual states within the United States. In fact, states are much more likely to lose jobs and people to other states than to other nations.

With this in mind, economists Arthur Laffer and Stephen Moore have released Rich States, Poor States, published by the American Legislative Exchange Council (ALEC). The book offers lawmakers and citizens facts with which to evaluate states’ fiscal and economic policies and analyze their results and ramifications.

Top 10

“States that have controlled spending and taxes are doing better than states that have not done these things,” Moore said. “High taxes don’t redistribute income; they redistribute people. Our work on this book shows that.”

Laffer’s “Laffer Curve” analysis of tax rates, economic growth, and government revenues shaped the tax-cutting policies of the Reagan administration in the 1980s. Laffer served as a member of President Ronald Reagan’s Economic Policy Advisory Board for both of Reagan’s terms as president. Moore is founder of the Club for Growth and senior economics writer and editorial board member at The Wall Street Journal.

South, Southwest States Lead

The authors provide economic competitiveness rankings for all 50 states based on 16 policy variables with a proven effect on the migration of people and investment capital in and out of states.

States with the lowest tax, spending, and regulatory burdens win the competitiveness contest. These are primarily in the South and Southwest regions of the nation.

California and states in the Northeast and Midwest are the biggest losers.

A record eight million Americans moved from one state to another in 2006, revealing which states have the most dynamic and desirable economies and which are “has-been” states, according to Laffer and Moore.

Golden State Loses Luster

“When California faced a Mount Everest-sized $14 billion deficit in 2003, one of the major causes for the red ink was the stampede of millionaire households from the state,” Laffer and Moore note in their report. “Out of the 25,000 or so seven-figure-income families, more than 5,000 left in the early 2000s, and the loss of their tax payments accounted for about half the budget hole.”

Migration Trends

The Golden State also has tarnished itself among less-wealthy persons. Moore said migration trends based on moving company data show California had the second-highest domestic population outflow of any state in 2005 “despite the beautiful weather, beaches, and mountains.”

California budget officials are predicting another $14 billion deficit this year, although the state has some of the highest tax burdens in the nation. The state budget has ballooned from $79.8 billion in fiscal 2004-05 to $102.3 billion this fiscal year, a jump of 28 percent.

Domestic Migration

“States are in direct competition with each other for human capital and business investment. State governments that think they can attract jobs and people, and grow their economies, by taxing their citizens at a higher rate than their neighbors are sadly mistaken,” said Arkansas state Sen. Steve Faris (D), ALEC’s 2008 National Chairman. “Legislators should take a close look at where their state ranks in this book and use it as a tool to help them improve.”

Good Policies Reversed

Moore said he has become somewhat discouraged that government officials at all levels apparently have failed to recognize the benefits of tax cuts, spending controls, and open markets.

“We’ve gone from $25 trillion to $56 trillion of asset value in 25 years,” said Moore. “Policies that were enacted in the 1980s to bring this about are being reversed.”

He cited presidential candidates and state lawmakers who have been promoting and enacting tax hikes, expanded entitlement programs, and trade restrictions.

“I think we are going to see tough times in state budgets in 2008,” Moore said. “Most states have had enormous spurts of spending growth. They can’t keep growing their expenditures as they have been doing. Much of the rest of the world is using the Reagan model, because they see the benefits that have resulted, and here many people are moving away from it.”

Steve Stanek ([email protected]) is managing editor of Budget & Tax News and a research fellow at The Heartland Institute.