Our federal system is aptly called the laboratory of democracy. Rather than learning everything from the school of hard knocks, states can look to the experiences of others through initiatives like charter schools, right-to-work laws, and taxation levels. Unfortunately, there are some slow learners out there.
The IRS recently released its annual report on the net migration of people and money between states. Once again, the high-tax-and-spend states lost out. California was the biggest income loser ($23.8 billion) in 2002, followed by New York (14.2), Illinois (9.8), New Jersey (5.3), and Massachusetts (3.9).
Florida gained $36 billion in migrating revenues; Texas realized $10.1 billion, followed by South Carolina, Tennessee, and North Carolina. Arizona gained $3.7 billion in gross adjusted income (AGI), mostly from the 57,857 people who migrated from California, compared to 25,677 moving from Arizona to California.
Who knew people prefer to live where housing is affordable, power is reliably available, and crime is taken seriously by authorities? California not only fails on these tests, but its gas taxes are the highest in the nation. This means gasoline costs $1 to $2 a gallon more, and electricity bills are 2 to 3 times higher than in states without California’s climate mandates. Temperatures don’t seem to be coming down much so far.
California’s median-priced home is about double that of most states, and the state tax on middle-income earners is 9.3%, more than most states assess their millionaires. Governor Gavin Newsom can prattle on the “California Dream,” but Californians don’t feel it. They’re leaving if they can.
Moreover, it’s getting worse. California lost nearly three times as much income to other states in 2022 as it did in pre-COVID-19. Even though housing costs discouraged many from moving, New York lost 1.8% of the total state AGI, 3.1% in 2021, and 2.5% in 2020.
Florida and Texas were among the beneficiaries, with 150 to 200% more income being transferred from high-spending states than before the pandemic.
California, New York, Illinois, and other states have created a “doom loop” with their foolhardy fiscal policies. Fewer workers and less total income result in lower tax revenues. The tax and spenders must raise tax rates to maintain their social programs, promise to unions, and finance their rising debt. Rinse and repeat.
Most enterprises, faced with falling revenues and climbing expenses, would update their business model. But the high-tax states aren’t interested in changing their ways. California is moving forward with yet more climate mandates and boondoggles like the infamous “train to nowhere.” Illinois rejected fiscal discipline and instead passed a budget with $1.1 billion in tax increases. New Jersey, hemorrhaging jobs, went ahead anyway with reimposing a 2.5% surtax on corporate incomes.
Rather than pursuing modest reforms or spending cuts, the blue states are instead trying to force other states to help them pay for their high taxes. They love the state and local tax (SALT) deduction, which requires taxpayers from Florida, Arizona, and other frugal states to pay part of the state tax bill for high-earners from high-tax states. They are insistent that Congress remove the $10,000 cap on the deduction, which would further incentivize their excessive spending.
The cap raises about $80 billion a year of relief for federal taxpayers. The Brookings Institution found that if the SALT cap were eliminated, 57% of the benefit would go to the top 1% of earners. Still, the tax and spenders claim Congress “screwed” them by instituting the cap, thereby supposedly creating much of their fiscal woes.
States have also become more careless in managing their pension fund obligations. Raising benefit levels is popular, while funding can be deferred. Unsurprisingly, the result is chronic underfunding. New York has assets that would fund only 48% of future legal obligations according to standard accounting procedures, and New Jersey is at 29%.
Future shortfalls will eventually result in public bankruptcies and destitute pensioners. Still, states resist reforms, assuming the feds would not ultimately deny bailout requests in such desperate circumstances.
States must be accountable for their own actions. They should not be allowed to exploit each other to cover for their moral and financial shortcomings.
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