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  • High-Tax, High-Spend Model Still Does Not Work

    State government finances are in a bad way, and for an examination of why that is the case, see the latest edition of “Rich States, Poor States,” released this week by the American Legislative Exchange Council. The basic story, as anyone following state fiscal issues will surely know, is that too many states went on spending binges in the early part of the decade when revenue was rolling in, but didn’t leave enough in reserve to handle the collapse in revenues caused by the 2008-2009 recession. The ALEC volume is, as past editions have been, chock full of great information. For instance:

    • Did you know that if states had just kept their spending growth the same as population growth plus inflation between 2002 and 2007, they could have maintained all their services and still provided a $500 billion tax cut?
    • Why did states leave nothing in reserve? Political pressure, especially from government employee unions is a big part of the story. State legislatures, for instance, have lavishly enhanced pension benefits, but state employees should have little confidence that the states will ultimately make good on those promises. Only 9 percent of state pension plans have enough assets to be considered safe according to government standards.
    • Many state legislatures, unwilling to take on the well-organized lobbies for government spending, have resorted to raising taxes on the rich. But that will only exacerbate the boom-and-bust budget cycles, as Maryland’s experience demonstrates:

    Politicians in Annapolis created a millionaire tax bracket, raising the top marginal income-tax rate to 6.25 percent. … Already, Maryland has seen a one-third decline in tax returns from millionaire households. The rich have literally disappeared from the state tax collectors’ sights. Instead of the state coffers gaining the extra $107 million the politicians predicted, millionaires paid $257 million less in taxes than they did last year… . [Internal citations omitted.]

    • Yes, taxpayers and businesses vote with their feet, because some states’ policies—e.g., lower taxes, less labor regulation—are better for the economy than others. Utah, Colorado, Arizona, South Dakota, and Florida are the top five ranking states in the ALEC-Laffer State Economic Competitiveness Index for 2010. The top ten states in that index have had population growth of 18.5 percent over the decade 1998-2008, while the ten lowest ranking states had population growth of only 5.2 percent over that period.

    Cross-posted at Insider Online.

    Posted in Ongoing Priorities [slideshow_deploy]

    2 Responses to High-Tax, High-Spend Model Still Does Not Work

    1. Tom H, South Dakota says:

      I am not sure I would put too much value in the ALEC-Laffer Index to determine if the State government is fiscally responsible.

      My brother-in-law was a State employee in Arizona until recently. Last year they had forced leaves and reductions in wages. That continued into this year. To top that off, there is a State retirement plan that he contributed to and upon resigning he requested his funds (he was not fully vested), and the State told him they may not be able to pay him until the end of this year. This was money he contributed!

      I think at the very least the title "Rich States, Poor States" is misleading. Other than that, I agree 100% that high-tax and high-spend does not work anywhere, anytime.

    2. Zack says:

      so we should… borrow spend. tax cuts for the rich. borrow spend. add 8.5 trillion to the national debt. conservative puppy's…..your fiscal approach is much much much worse!

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