In his book How Money Walks, Travis Brown analyzes the migration of money between the 50 states. His findings are compelling yet logical: since the early 1990s low-tax states have been money magnets while high-tax states have been hemorrhaging money. Almost all states without income tax have been winners while almost every high-tax state has lost income.
You don’t have to be an economist to understand the logic behind Brown’s findings. Every taxpayer with bills to pay, kids to put through college and the desire to build a little extra financial security will prefer low taxes to high taxes. By the same token, it would be logical for politicians in low-tax states to want to preserve their relative advantage and keep attracting productive citizens from other states. (Note: Check out KPD’s tax burden app to see your state’s tax burden)
Unfortunately, the low-tax logic is encountering resistance even in some low-tax states. Before Christmas, Alaska Governor Bill Walker proposed a massive tax-hike package that includes the reinstitution of the Last Frontier State’s income tax (which has been dormant since 1980). While the package was not well received among state lawmakers, the governor has persistently asked his critics to come up with credible alternatives - or accept his proposal. So far, the response has been silence.
Alaska has enormous budget problems resulting from irresponsible over-spending during the heydays of high-priced oil (as shown in the chart). When severance taxes flowed into the state budget like manna from heaven (or the oil fields on the North Slope) it was easy to expand education, Medicaid and other state spending programs.
Now, with oil below $30 and more likely to hit $20 than $50, the gut reaction among Alaska legislators seems to be to safeguard big spending at any cost. If they cannot “beat” the governor’s tax-hike package, “at any cost” they will reintroduce Alaskans to the state income tax.
As if the talks about an income tax in Alaska were not enough, similar ideas are being whispered in Wyoming. The virtual free-fall in oil prices and plummeting demand for coal have formed a perfect budget storm. Thanks to rapidly falling severance tax revenue, in two short years the state could face a $700-million deficit - in a $3.4 billion budget.
So far there are no official proposals of an income tax in Wyoming. Elected officials carefully avoid talking openly about the idea. However, proposals of higher taxes are simmering just below the political surface. Governor Matt Mead thinks he can ride out the revenue shortfall by “investing in government”. In plain English, shielding government spending from the revenue losses.
Officially, legislators generally follow in Governor Mead’s footsteps: while the Joint Appropriations Committee recently rejected Medicaid Expansion, there is very little enthusiasm for spending reductions. At the same time, you can hear whispers in the hallow halls of the legislature about tax increases - possibly even the reintroduction of the income tax.
Unlike Alaska, Wyoming would need a constitutional amendment to revive its personal income tax. However, with a looming budget shortfall of 20 percent it is relatively simple for those who want to protect government spending to stir up fiscal panic among the public. That, in turn, would secure a majority vote for an income-tax ballot measure.
On the face of it, the prospective revenue may be attractive. However, a state income tax would quickly rob Wyoming of its appeal as a low-tax state (excluding severance taxes). While Wyoming also has no death tax, only 14 states do so its absence is even less unique. Sales and property taxes are slightly on the low side, but even a low, flat income tax of three percent would quickly neutralize that cost-of-living advantage.
The situation in Alaska is even more desperate. In addition to an income tax, Governor Walker’s tax-hike package would significantly raise the gasoline tax, as well as taxes on other fuel types. Since Alaska gets almost all its consumer goods shipped in by barge or air cargo, the cost of living would rise dramatically.
Other low-tax states would certainly benefit from tax-hike mistakes in Alaska and Wyoming. Interstate competition is strong for jobs, investment and retirement money. The lawmakers and governors in these two states should be aware of this. They should realize that if they choose to eliminate budget deficits with higher taxes, their states will pay a high price when career professionals, entrepreneurs, businesses and investors gravitate toward other, more affordable states.
As politically painful as spending cuts might be, when they are well structured and permanent they tend to produce lasting benefits for the state. Most important of all, spending cuts would allow Alaska and Wyoming to remain low-tax states. Travis Brown’s book is one of many pieces of evidence to the benefits of that.
Note: This is a guest post by economist Sven Larson.
Sven Larson is an economist and Member of the Council of Scholars with Compact for America. He has a blog called America’s Fiscal Future and he recently published "Robbing the Millennials: How We Looted Our Kids' Future and the New Handshake We Owe Them", a book about how the federal debt is another massive tax burden on the shoulders of the Millennials. Larson not only puts the debt in its proper macroeconomic context, but also suggests a radical debt payoff plan. His book is available at: https://www.smashwords.com/books/view/607340
J. Scott Moody has over 18 years as a public policy economist with a specialty in tax policy and has over 180 publications. He has worked for numerous national and state-based think tanks such as Federalism In Action, Tax Foundation, Heritage Foundation, and The Maine Heritage Policy Center.