Texas or Tax Us

Once upon a time in America, there were two kingdoms. One was named Texas and the other was named, well lets say New York or California or one of many other kingdoms that exist in America.

Recently someone who lives in Texas was asked how she was weathering the recession. She answered the question with a question - "What Recession?". Texas it seems, has dodged the bullet whereas many of the rest of us have not. To add insult to injury, Texas does not even have a state income tax. Finally, the unemployment rate in Texas (as of July 2009) is 2% behind the national average (7.5% compared to 9.5%).

Coming from a "blue state" as I do, I cannot understand why my state and many or the other blue states are struggling. In fact, many have unemployment rates either by state measures, or major city measures that are higher than the national average. The solution in most blue states is to become more like "tax us" than Texas. In other words, where Texas believed that a state tax would be regressive, California has a state tax of 10.5%. New York is close and might even surpass California by the end of the year.

How did we get this disparity between a state like Texas and many other progressive states in the union. Simple - all of us (but the most radical liberals) have learned a long time ago there is no such thing as a free lunch. In other words, someone always has to pay the bill, pick up the tab. States that are really in hot water such as California and New York, seemed to have forgotten that lesson. The solution always is to tax the producers and let more and more non-producers have a free ride. To quote a prominent politician in Washington, " When we have more people riding in the wagon than pulling the wagon, it is hard to go forward". The producers in high tax states understand what is going on - they are now voting with their feet. For example, last year California lost 10,000 millionaires to lower taxed states. Simple math - the number of producers decreases, the number of non-producers increases and the net result in California is a $20B deficit and growing.

What I find the most interesting is this problem has become endemic - it is in most states as well as the Federal Government. Dr. Art Laffer who advised President Reagan as part of this Economic Team, has written and spoken out many times on how much taxes drag on the economy. There comes a point in diminishing returns when the marginal rate becomes so high that the producers simply stop producing. They either take their business elsewhere (out of the high tax state or even the country) or cash in. When taxes are low, productivity and innovation flourish; when they are high, the opposite occurs. This has been proven over and over throughout time.

When Minnesota had a very liberal senator years ago, the standing joke was, "Don't worry, the good news is we are only going to tax the rich. The bad news is that you are rich". What that means is if we cannot control the appetite of government, and once the producers start to disappear, then the unsustainable tax burden will fall on each of us and that will be the beginning of the end for prosperity in America.