About this time of every year, households across the country start thinking about taxes. W-2s arrive in the mail and businesses like H&R Block start ramping up their marketing efforts. But a different kind of tax marketing is beginning as state governments begin the new year - many of them are lobbying to repeal state income taxes. This is a remarkable trend that suggests states are increasingly making moves to be more competitive in attracting individuals and businesses.
The Wall Street Journal (via Cato-at-liberty) reports that proposals to eliminate state income tax is gaining broad support in Georgia, South Carolina and Missouri. And in Michigan, the business income tax looks set to be repealed. According to economist Arthur Laffer:
"States are now in a ferocious competition to attract jobs and businesses, and one of the best ways to win this race is to abolish the state income tax."
There are already nine states with no state income tax, an advantage that means real, incremental dollars into the pockets of households and businesses. The states with the highest income taxes in the Northeast continue to bleed people and jobs to lower-tax regions in the Southeast and Southwest. Personally, I remember this being a pretty big selling point when I got my first job out of college with SunTrust Bank in Florida. In those salad days, every extra penny counted!
Aside from matching an advantage held by other states, increasing tax surpluses are also putting pressure on state governments to return funds to its citizens. A strong national economy is filling state coffers, and even New York City has a $1 billion surplus.
A tax surplus represents what is possibly the worst use of money imaginable. First, surpluses mean the government is taking more dollars from its citizens than is necessary. This simply isn't fair in a democratic regime. Second, surpluses fail to produce pressure on government to become more efficient. A surplus is like Christmas for bureaucrats, as each department proposes countless ways to (inefficiently) use these extra funds.
Some may fear that a competition to drive lower taxes will result in a worse state longer term. I suppose it is possible that some future crisis or recession could weaken now bloated state coffers. And once removed, taxes are very hard to get passed again.
On the other hand, I tend to believe that the competition among states is really about which ones can produce the best overall living conditions. So those that simply cut services dramatically might not attract new residents. Tellingly, the states with no income tax have been growing at a faster rate for decades. Perhaps the best quote comes from Cato-at-liberty's Daniel Mitchell:
"Tax competition is a marvelous liberalizing force. Every time a taxpayer leaves a high-tax jurisdiction for a low-tax jurisdiction, bad policy is punished and good policy is rewarded."
I also like that some governments actually seem to believe in a goal of lowering taxes over time. Just as prices of computers and food continue to tumble, should not government costs as well?
The only downside is that my home state of Ohio does not seem to have an income tax repeal in the pipeline. But nearby Kentucky and Indiana might attract a lot of Cincinnatians if they got on the bandwagon!
UPDATE: This afternoon, Cato shows that low-tax competition among cantons in Switzerland (their equivalent to states) is also driving smaller, more efficient government and a vibrant economy.
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