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After decades of taxing the rich, the ‘Big Blues’ face the music

The dismal financial situation of high-tax states has been long in the making

New York Gov. Andrew Cuomo should look at his state’s outdated economic policies to explain its current fiscal woes instead of blaming stock market losses and the GOP tax law, Winston writes. (Tom Williams/CQ Roll Call file photo)
New York Gov. Andrew Cuomo should look at his state’s outdated economic policies to explain its current fiscal woes instead of blaming stock market losses and the GOP tax law, Winston writes. (Tom Williams/CQ Roll Call file photo)

OPINION — “Tax the rich. Tax the rich. Tax the rich. The rich leave. And now what do you do?”

Those were the plaintive words of the man in charge of guiding New York’s fiscal ship of state, Gov. Andrew Cuomo, as he announced earlier this month a projected $2.3 billion state budget deficit.

State Comptroller Tom DiNapoli, a fellow Democrat, added to the misery, saying in their joint news conference, “This is the most serious revenue shock New York has faced in many years,” and likely to “get worse before it gets better.”

Cuomo blamed the December stock market decline and the Republican tax law that limits the deduction for state and local taxes, or SALT, for the state’s fiscal woes.

He’s not the only politician looking for cover.

Democratic governors, especially in the Big Blues — New York, California, Illinois and New Jersey — and big city mayors have been quick to blame their revenue shortfalls on a raft of excuses, from SALT to the concentration of wealth among fewer people to the “rich” not paying their fair share. The tax changes in the SALT deduction, which have only been in place for a year, may have been the straw that broke the camel’s back for some and probably has had some impact, but SALT didn’t create the revenue crises facing the Big Blues.

That we can attribute to their reliance on an outdated economic philosophy characterized by higher and higher taxes and regulation on both businesses and taxpayers. Over the decades, that philosophy has transformed the Big Blues from meccas of wealth and opportunity into states losing population, losing business and, inevitably, losing the revenue they need to fund their increasingly generous social policies.

Yet while New York, California, Illinois and New Jersey are scrambling to find solutions to their fiscal problems, states like Texas and Florida with their pro-business, low-tax policies have become magnets for economic investment and people looking for a friendlier tax environment. And, let’s face it, February in Miami has other advantages over New York than just favorable state tax policies.

No comparison

A look at wealth and population data shows the stark differences between the Big Blues and their low-tax competitors.

The personal finance website WalletHub recently looked at the states with the highest tax burden based on property taxes, personal income taxes and sales taxes as a percent of personal income. New York came in at No. 1 with the highest tax burden in the country — 13.04 percent. Illinois, New Jersey and California had the dubious distinction of making the top ten, coming in at 10.08 percent, 10.02 percent and 9.57 percent, respectively. Texas came in 33rd with an 8.15 percent tax burden and Florida was 47th at 6.64 percent. Overall red states had a significantly lower tax burden than blue states.

But what about business? Chief Executive Magazine annually asks CEOs to rate the states to determine the best and worst for doing business. In this list, California took the “honors” as the worst state to do business, with New York, Illinois and New Jersey right behind. Texas was named the best state in the country to do business, with Florida at No. 2. No wonder Amazon needed tax incentives to pick New York City for a headquarters when low-tax states like Tennessee were competing.

According to an analysis of IRS data done by Travis Brown, author of “How Money Walks”, New York lost more wealth from 1992 to 2016 than any other state — $99.5 billion (measured in adjusted gross income). California was next at $58.6 billion, followed by Illinois at $50.1 billion and New Jersey at $35.4 billion. Not surprisingly, their population migrations in a similar time frame (1985 to 2016) mirrored their loss of wealth.

In the Empire State, 1,753,574 residents called a moving van and hit the road, many heading for low-tax states. Illinois saw 729,881 of its residents leave; California, 648,072; and New Jersey, 541,834.

The big winners of this migration were, no surprise, Florida and Texas. During the same time period, Florida gained $156.1 billion in wealth, while Texas benefitted from an almost $47 billion wealth increase. Florida received an influx of nearly 2 million people from other states, and Texas saw more than 900,000 new residents.

This migration of wealth and people translates into economic growth, jobs, increased tax revenues, higher real estate prices, and likely more congressional seats.

In the most recent state-by-state GDP data from the U.S. Bureau of Economic Analysis, the second-quarter growth rate showed Texas with an amazing 6 percent growth in GDP and Florida with 4.5 percent growth, topping the national average of 4.2 percent. The Big Blues all fell below the national average with New York at 3.1 percent, New Jersey at 3.4 percent, Illinois at 3.6 percent and California at 3.7 percent.

Are you beginning to see a pattern here?

Leveling the field

While SALT is likely to have a negative impact on the Big Blues, the outward migration and loss of wealth in these states didn’t happen over the past year. Their dismal financial situation has been long in the making. The 2017 tax overhaul simply interjected some fairness into what has been an uneven tax burden for taxpayers in low-tax states.

Before the new tax law was enacted, when New York or California raised its taxes, for example, all state and local taxes could be deducted from taxpayers’ federal tax bills. So, residents in big spending, high-tax states got a tax break that added to the federal deficit and counted on taxpayers in lower-tax states like Texas and Florida to pick up the tab.

Rather than blaming federal tax policy for lower revenue projections, a better first step for the Big Blues and their colleagues in the country’s urban centers might be to rethink their high tax and regulation policies, and the expensive social programs that are driving businesses and the wealthy to seek more friendly climes.

How important is it to change tax policies to keep high-income tax payers? A New York Times story from 2016 noted that the “top 1 percent pay a third or more of total income taxes” in New York, California, Connecticut, New Jersey and Maryland. One New Jersey hedge fund billionaire apparently had had enough. He pulled up stakes and moved himself and his business to Miami, a decision that may have cost the state hundreds of million in lost taxes.

The Republican leader in the state General Assembly told the Times, “If you’re making hundreds of millions of dollars, and you’re paying close to 10 percent to the state of New Jersey, you do the math.”

As states become more and more dependent on a smaller and smaller number of uber-rich taxpayers to fund their coffers, a handful of outbound taxpayers can cause the kind of budget crisis facing New York this month.

Without a change of direction, the Big Blues will become more than a nickname.

David Winston is the president of The Winston Group and a longtime adviser to congressional Republicans. He previously served as the director of planning for Speaker Newt Gingrich. He advises Fortune 100 companies, foundations, and nonprofit organizations on strategic planning and public policy issues, and is an election analyst for CBS News.

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