This is a tale of three states — California, New York and New Jersey. They are states with strong economies and large populations, yet they are financial and fiscal basket cases. What went wrong?
The Albany-Trenton-Sacramento Disease (Wall Street Journal, June 26, 2009)
…A decade ago all three states were among America’s most prosperous. California was the unrivaled technology center of the globe. New York was its financial capital. New Jersey is the third wealthiest state in the nation after Connecticut and Massachusetts. All three are now suffering from devastating budget deficits as the bills for years of tax-and-spend governance come due.
These states have been models of “progressive” policies that are supposed to create wealth: high tax rates on the rich, lots of government “investments,” heavy unionization and a large government role in health care.
This last sentence says it all. Despite decades of ‘enlightened’ policies, these states are in trouble. To hear the media and the politicians, the problem is all about the current recession and the resultant drop in tax revenues. Yet, aren’t recessions fairly normal? Doesn’t it make sense to save a bit in the fat years, so there is less belt tightening in the lean years?
The Wall Street Journal continues:
…Has all this public sector “investment” translated into jobs? Not quite. California had the nation’s third highest jobless rate in May (11.5%). New Jersey and New York had below average unemployment rates in May compared to the national average of 9.4%, but one reason is that so many discouraged workers have left those states. From 1998-2007, which included two booms on Wall Street, New York and New Jersey ranked 36th and 31st in job creation. From 2000 to 2007, the New Jersey Business & Industry Association calculates that nine out of 10 new Garden State jobs were in the government.
…The state-local income tax burden, according to the Tax Foundation, is the highest in the nation in New York, second highest in California and sixth in New Jersey. New York City boasts the highest business tax rate, 17.6%, according to a study by the American Legislative Exchange Council. Seven of the 10 highest property tax counties in America are located in New Jersey.
Instead of balanced budgets, these high taxes have produced record red ink. California’s deficit for 2010 is projected at $33.9 billion, New Jersey’s $7 billion and New York’s $17.9 billion, despite multiple tax increases this decade. The Manhattan Institute finds that three-quarters of the loss in revenues this year in Albany is a result of reduced income tax payments by rich people even though the state keeps raising taxes on high earners.
In California, we hear that we just need to raise taxes and then everything will be fine. Yet, taxes are already very high. One definition of insanity is doing the same thing over and over and hoping for different results. The problem we see is that our officials can and will spend everything that comes in, and more.
From the New York Times comes some startling statistics from a study of state spending and tax revenues:
“These are some of the worst numbers we have ever seen,” said Scott D. Pattison, executive director of the National Association of State Budget Officers…
OK, I’ll bite. How bad are they? Many businesses have had revenues declines of 20% or 30% or even much more. Is it that bad at these states?
Over all, personal income tax collections are down by about 6.6 percent compared with last year, according to a survey by Mr. Pattison’s group and the National Governors Association. Sales tax collections are down by 3.2 percent, the survey found, and corporate income tax revenues by 15.2 percent.
Frankly, a revenue drop of 6.6% really does not seem like the end of the world to me. But then we get a glimpse of the real problem:
While state general fund spending typically increases by about 6 percent a year, it is expected to decline by 2.2 percent for this fiscal year, Mr. Pattison said. The last year-to-year decline was in 1983, he said, on the heels of a national banking crisis.
First, state spending increases by about 6% per year? Why? Cost of living increases are way below that and even if you add in population growth, the total would be much less than 6% for most states. Not to mention those states with population decreases. So, the states are used to fat increases each year, but this year revenues are down by 6.6%. Have they cut spending by that much? Not a chance. In fact, spending is set to be slashed by the enormous amount of 2.2%.
So, when you read about draconian budget cuts and slashed spending, take it with a grain of salt.
A decade of deficits
This chart shows how strong tax revenue growth has been in California for most of this decade. Yet, despite strong revenue growth, spending always exceeded revenues. So, now we’re in trouble. Had our legislators kept spending in line with revenues, we would not be in this mess.
Source: California Republican Party
As you can see from this chart, spending was about 9% over revenues at the beginning of the decade and it still exceeds revenues by that much, despite strong tax revenue growth. In fact, tax revenues have grown consistently for this decade at a substantial annual rate of 4.35%. If state spending had grown at 3% per year, which is roughly the rate of inflation, then the budget would be balanced this year.
The WSJ piece summarizes the issues well:
So goes the real-life experience of progressive governance, with heavy tax burdens financing huge welfare states, and state capitals dominated by public-employee unions. Formerly rich states, they are now known for job losses, booming deficits and debt, wage stagnation, out-migration and laughing-stock legislatures. At least Americans have the ability to flee these ill-governed states for places that still welcome wealth creators. The debate in Washington now is whether to spread this antigrowth model across the entire country.
What is the path to prosperity?
This excerpt from a post I did last year, points out a path to prosperity that — as opposed to the CA, NY & NJ model — has worked well. The factors of this approach are high levels of economic freedom, moderate taxes and sensible regulations:
The Path to Prosperity (The American Magazine, August 7, 2008, Amela Karabegovic and Alan W. Dowd)
A new report confirms that low taxes, limited government, and flexible labor markets help to spur economic growth.
There are times when common sense is not so common. We may be in one of those times, which is why a new report on the power of economic freedom is so important.
Common sense tells us that low taxes, limited government, and flexible labor markets will help to spur economic growth. The Fraser Institute’s 2008 Economic Freedom of North America (EFNA) report offers a striking, yet unsurprising, picture of the benefits that flow from such policies.
In 2005, the most recent year for which data are available, Colorado, Georgia, Delaware, North Carolina, New Hampshire, Tennessee, and Texas-states with consistently strong records of promoting economic freedom-had an average per capita GDP that was more than $4,300 above the U.S. average. Their total growth from 1981 to 2005 was nearly 20 percentage points higher than the U.S. average.
In the latest EFNA index, Delaware is the top-ranked state or province in all of North America while Texas is tied for second with the Canadian province of Alberta. And for good reason: Delaware has the smallest size of government at the subnational level and ranks first among U.S. states on key taxation measures; Texas ranks first in labor-market freedom at the all-government level and has a state top marginal income tax rate of zero. Delaware and Texas also rank high in the categories of government transfers and subsidies as a percentage of GDP at the all-government level.
By comparison, West Virginia, Hawaii, Maine, Montana, New Mexico, North Dakota, and Rhode Island-states with low levels of economic freedom-had an average per capita GDP that was more than $4,300 below the U.S. average. Their total growth from 1981 to 2005 was 10 percentage points below the U.S. average.
Again, this is predictable: all of these states rank in the bottom half of the nation on taxation at the all-government level, labor-market freedom at the state/local level, and size of government at the all-government level…
If you improve and enhance economic freedom, more prosperity ensues. If you restrict economic freedom by increasing taxes or laying on more bureaucratic red tape, you inevitably reduce prosperity. Our economy is resilient, yet it should also be clear that people gain prosperity faster in areas with more economic freedom.