Leading Analyst Calls Tax-Raising Moves in ‘Blue’ States a ‘Suicide Strategy’

Published February 13, 2013

Joel Kotkin once again shows that he is a particularly astute observer and analyst of economic and demographic trends in his latest Forbes.com piece, “Blue States Double Down on Suicide Strategy.” He writes:

On one side are the blue states, who believe that higher taxes are not only just, but also the road to stronger economic growth. This is somewhat ironic, since, as we pointed out earlier, higher taxes on the “rich” would seem to hurt their economies more, given their high concentration of high-income earners. However, showing themselves to be gluttons for punishment, many of these states have decided to double down on high taxes, raising their rates to unprecedented levels.

This cascade of higher income taxes started in 2011 when Illinois, arguably the big state with the weakest economy, and the lowest bond ratings, raised income taxes by 66% and business taxes by 46%. Over the past year several other Democratic state governments have pushed through income tax increases, notably California, which raised the tax rate on people with annual income over $1 million to 13.3%, the highest in the nation. And now it appears that Massachusetts and Minnesota are about to raise their taxes as well.

And he adds,

They appear to have chosen an economic path that essentially penalizes their own middle and upper-middle class residents, believing that keeping up public spending, including on public employee pensions, represents the best way to boost their economy.

On the “other side” are the “red states” run by more freedom- and market-oriented lawmakers and governors who are trying to lower or eliminate taxes such as those on income. Several red states – Florida, Tennessee and Texas among them – already have no income tax.

Red state leaders, most notably Louisiana’s Bobby Jindal, are placing their bets on expanding their economies, which would create new taxpayers, boost consumer spending and expand collections of sales taxes, Kotkin writes.

In tax-raising blue states like California, Illinois, Massachusetts, Minnesota, and New York, Kotkin believes their tax increases could give the state governments a brief fiscal lift. But after a short time, people will react to the higher taxes in predictable ways.

For a short period there’s euphoria, as tax revenues flow in and the economy seems to recover. Yet the real problems, such as inadequate private-sector job growth, are never addressed, and as the high fades, the state again faces a loss of jobs and people.

Perhaps most troubling, states with high income taxes tend to lose people, particularly in the middle class. Over the past 20 years the four biggest net losers of population were high tax states: California, New York, New Jersey and Illinois. Between them they lost roughly a net 8 million out-migrants. The two big net winners, Texas and Florida, had no such taxes, and most of the other big gainers were relatively low-tax states.

Kotkin is no ideologue. He is an internationally respected analyst of economic, demographic and social trends. Among other things he is Distinguished Presidential Fellow in Urban Futures at Chapman University in Orange, California; a contributing editor to the City Journal in New York; a Senior Visiting Fellow at the Civil Service College in Singapore; and a Fellow at the National Chamber Foundation. He is executive editor of the newgeography.com Web site. And he is the author of two highly regarded books on development trends, his more recent being The Next Hundred Million: America in 2050, published by The Penguin Press. The book explores how the United States is likely to develop in the next 40 years.

If there were solid evidence the blue states’ tax-raising strategies could give them sustained life and vigor, the researcher in Kotkin would point us to it. Instead, he says it’s a strategy for suicide.

Given these realities, raising already high income taxes has to qualify as somewhat self-destructive over the long run. But so great are the pressures in the blue states to fund expansive welfare programs and public employee pensions that there’s little chance the rising tax tide will soon abate. Sadly, there’s no hotline that seems capable of persuading them to rethink their latest suicidal lurch.