Meet the CO-MINNOWs: Formerly Great States Doomed to Shrink

Includes: CMF, CXA, INY, NYF, PWZ, PZT
by: Joseph L. Shaefer

There are states whose population and/or individual tax base and/or corporate tax base have been shrinking for years, formerly great states doomed by their decision to buy votes via social programs that unfairly tax the middle class. To me, there are social programs like school breakfasts and lunches for kids who wouldn’t get one at home, aid to the disabled, and other programs for those currently or permanently unable to enjoy the same opportunities others of us enjoy.

Then there are what I call social (or anti-social) pogroms because they do what all pogroms are intended to do: persecute one particular group, in this case the top 50% of Americans who work hard and pay 97% of all taxes.

Pogroms are characterized by being officially encouraged and I have not seen a time in the USA where this thinking is more officially encouraged than it is today. “We need to spread the wealth” is the excuse to engage in all manner of social pogroms that benefit one (usually large) block of voters at the expense of another (usually more fragmented) group which embraces many issues rather than the single, “Who will offer me more money?”

The states that have engaged in this kind of thinking are numerous -- but six rise to the forefront when we analyze who is most adept at over-taxation, ridiculous fines and licensing fees, using corporations as whipping boys, and taxing them into leaving for other states. I call them the minnows. Once mighty fish, they now flop about like minnows out of water. They are:

  • Michigan
  • Illinois
  • New York
  • New Jersey
  • Ohio and
  • Wisconsin

These states were always known to feature cold winters and high taxes. If only they had done something different instead of giving all their tax dollars to social pogroms and driven more and more of their tax base out of the state. More and more taxes on fewer and fewer residents is not a recipe for long-term survival.

Hawaii is in dreadful straits too, but they at least have weather that people flock to. Their incredible government mismanagement is masked by new tax revenue coming in from those escaping the harsh weather of the upper Heartland and the Northeast. When you’re #2 in weather, you have to try harder. The MINNOWs don’t.

For instance, New York once held more Fortune 500 companies than any other state. Now that honor goes to Texas, which has no personal income tax. New York’s response? Raise taxes on those people and corporations that haven’t yet left!

Of course, not all went to Texas right away. Initially a huge number of those dispossessed by New York state and city taxes, regulations, licensing fees, etc. went across the Hudson to New Jersey. A nice easy commute to Manhattan and, if you relocated your company to Hoboken or Jersey City, you could still maintain an office downtown or in mid-town for client PR and be there in 30 minutes.

From 1999-2003, New Jersey got most of the benefits of people and companies leaving New York. It enjoyed a $98 billion net wealth inflow during those 5 years! So what did they do to encourage more of this easy largesse? Why, they created more social giveaways and taxed the hell out of the newcomers. In the five years from 2004 to 2008, New Jersey suffered a $70 billion net outflow in wealth due to a huge drop in the number of wealthy households entering the state and an increase in the number of wealthy households leaving.

New York, New Jersey, Wisconsin, Michigan, Illinois, and Ohio, here’s a news flash for you: there is no law that requires people who are being mistreated to stay in your state! Money goes where it is treated best.

If you hate “rich” people, even though that upper 50% of taxpayers pay 97% of all your taxes, just keep doing what you’re doing and pretty soon you’ll enjoy the same worker’s paradise that the USSR did and Venezuela et al are careening into today. If you don’t hate them, but merely consider them yours to pluck money from to dispense to others…well, the result is the same. They vote with their feet.

When I was young, I embraced the first part of the hoary old dictum, “If you are not a socialist when you are young, you have no heart. If you are a socialist when you are old, you have no head.” I just didn’t have the luxury of staying young long enough to remain a socialist; I had to work for a living. Doing that will quickly disabuse you of the notion that everyone works equally hard or equally smart. There are some lazy, smarmy, nasty, malingering, brutish people out there.

These were great states before they embraced the leavening effect of “spreading the wealth” rather than responsible government. Equal opportunity is a laudable goal of social programs; equal dispensation of the fruits of the work of the ants to the grasshoppers is insanity.

It would be bad enough if there were just MINNOWs – but now we have a codependency on the part of two states that once smugly derided these others. California and Oregon, two of the most beautiful states with the most extensive natural resources and exceptional farm land in the country, who used to attract much of the money fleeing cold winters and high taxes, have now devolved into a sad imitation of the other MINNOWs.

I and others have written extensively on the demise of the Golden State. I was born there. I worked there for a number of years. I visit friends, family and the exceptional geography there regularly. You’ve heard of all the other idiocies in California. Let me now recount the latest. This is so egregious that I assumed it was one of those email urban legends until I actually went to the California State Website.

There I discovered that California, wisely afraid to “raise taxes,” is elevating revenue instead by raising every traffic fine across the board. Effective January 6, 2010, it will now cost you $328 if you are ticketed for driving 16 miles over the speed limit; $214 for failure to notify DMV of address change within 10 days; $950 to buy a device that obscures your license plate from the Big Brother cameras; and $950.00 plus $50 “security and conviction fees” to park in a bus loading zone. Hey, that’s nothing -- there’s a $380 fine for “Littering Within 150 Feet of a Body of Water” and $57,000 for “Unlawful Sale or Purchase of Abalone.”

Oregon has the same loony outlook on business, chasing many of its entrepreneurs to Nevada, Arizona, Idaho and other more business-friendly states. Oregon trumpets that they have no sales tax as an enticement to attract new residents. (I liked Oregon better when they had a sign at the California border: “Welcome to Oregon. Now Go Home.”) Of course, they don’t mention that to make up for that they have an 11% tax on personal incomes. People in Vancouver, WA love it. They pay no income taxes and can do all their shopping in Portland, OR, 5 minutes away. What’s Oregon’s response? Try to get retailers to only sell to those with an Oregon residency?

It’s a sad “state” of affairs. My best investment advice? Sometimes advising what I wouldn’t be buying is even more important than what to buy. So – I’d avoid the public debt of most every one of these states and most of their municipalities as well.

If you must buy them, stick only with something rated AAA on its own (not because of some “insurance” from an unstable insurer.) Or forsake high yield and buy “pre-refunded” or “escrowed to maturity” bonds. You’ll earn less with this money-in-the-bank-to-pay-at-maturity kind of bond but, as I’ve written before on this subject, you should be every bit as concerned this year about the return OF your principal, not just the return ON your principal.

Finally, if you are willing to short municipals, here is a list I published a few weeks back of, in my opinion, ETFs that buy bonds exclusively from the two dumbest states whose problems are entirely of their own making and which, again, in my opinion, are hiding their heads in the sand (or somewhere): California and New York.

  • CMF – iShares S&P California Municipal ETF
  • CXA – SPDR Barclays Capital California Municipal ETF
  • INY - SPDR Barclays Capital New York Municipal ETF
  • NYF - iShares S&P New York Municipal ETF
  • PWZ – PowerShares Insured California Municipal ETF
  • PZT - PowerShares Insured New York Municipal ETF

Misery must love company, ‘cause there are other great fish even now preparing to join the CO-MINNOWs club…

Disclosure: No positions