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As each April 15 prompts Americans to focus attention on federal income tax returns, this day also brings opportunity to discuss state-level tax policy, its impact on a state’s economic outlook ranking and the long-term growth prospects it creates.
States implementing onerous tax codes often learn just how prone taxpayers are to “voting with their feet.” According to a new Rich States, Poor States report released by the American Legislative Exchange Council (ALEC), Texas leads the nation as the highest in-migration state. That is, people are leaving other states and moving here. Other top in-migration states are Florida, North Carolina, Arizona and Georgia.
Conversely, New York followed by California, Illinois, Michigan and New Jersey are states with the highest out-migration.
2014 ALEC-Laffer State Economic Competitiveness Index
The ALEC report provides the 2014 ALEC-Laffer State Economic Competitiveness Index which comprises two rankings: an Economic Outlook Ranking and an Economic Performance Ranking.
The Economic Outlook Ranking is a forecast based on states’ current standing in 15 policy variable categories.
Per the report:
Each of these factors is influenced directly by state lawmakers through the legislative process. Generally speaking, states that spend less—especially on income transfer programs, and states that tax less—particularly on productive activities such as working or investing—experience higher growth rates than states that tax and spend more.
The 15 policy variables are:
- Highest Marginal Personal Income Tax Rate
- Highest Marginal Corporate Income Tax Rate
- Personal Income Tax Progressivity
- Property Tax Burden
- Sales Tax Burden
- Remaining Tax Burden
- Estate or Inheritance Tax (y/n)
- Recently Legislated Tax Changes
- Debt Service as a Share of Tax Revenue
- Public Employees per 10,000 Residents
- Quality of State Legal System
- State Minimum Wage
- Workers’ Compensation Costs
- Right-to-Work State (y/n)
- Tax or Expenditure Limit
The Economic Performance Ranking is described as “a backward-looking measure based on a state’s performance on three important variables: State Gross Domestic Product, Absolute Domestic Migration, and Non-Farm Payroll Employment—all of which are highly influenced by state policy. This ranking details states’ individual performances over the past 10 years based on this economic data.”
How the states rank
Utah tops this year’s Economic Outlook Ranking which is derived by giving equal weight to each state’s rank in the 15 categories. It is followed by South Dakota, Indiana, North Dakota and Idaho. New York is at the bottom with Vermont, Illinois, California and Minnesota rounding out the bottom five slots. Texas is #13.
With regard to the Economic Performance Ranking which tracks the last 10 years’ data, Texas ranks first followed by Utah, Wyoming, North Dakota and Montana. Michigan is #50 with Ohio, New Jersey, Rhode Island and Illinois taking the other bottom five slots.
Drilling-down on Texas
Texas’ performance in the Economic Outlook Ranking is fairly consistent. This year’s #13 slot comes with this history:
Our Lone Star State is a mixed bag, however, when it comes to the policy variable measures. Of the 15 categories, Texas is top five for six categories, bottom five for our debt service and low- to mid-rank on most of the others.
We rank #1 on points like personal income tax rate, minimum wage along with being a right-to-work state and not having an estate tax. High marks are also seen with our personal income tax progressivity and corporate income tax rate.
The downside comes as Texas is #48 for its debt service as a share of tax revenue. Other lower-level showings are in the categories of property tax burden (#39), remaining tax burden (#35), state liability system equitability (#35), public employees per 10,000 of population (#34) and sales tax burden (#25).
Texas’ Economic Performance Ranking breaks down to being #1 with its domestic migration numbers. From 2003-2012, a little more than 1 million people moved to the state. It ranks #3 with non-farm payroll employment seeing cumulative growth of 16.9 percent between 2002 and 2012. The state gross domestic product, ranked #4, experienced cumulative growth of 78.5 percent for the same period.
So what does it mean?
Obviously we’re getting some things right. People are attracted to Texas in large part thanks to our being a right-to-work state with no income or estate tax, competitive corporate tax rates, good wage opportunities and manageable workers’ compensation costs.
But, what happens if the growth subsides – or more frighteningly, reverses? Our “financial house” is best protected by being in order.
Our near-bottom debt service ranking relates to the state’s $322 billion local government debt. With $6.5 billion in new debt (more than $9 billion with interest) before voters on May 10, this area continues not only as a financial burden for current taxpayers, but also as a serious threat to future generations’ prosperity.
Property tax burdens similarly pose risks and largely tie back to Texas school districts, cities, counties, community colleges, health/hospital districts, water districts and authorities along with other special purpose districts – the same entities promoting local government debt.
The Rich States, Poor States report reminds how higher growth is experienced when and where states tax less. Aspects of the Texas tax structure demonstrate exactly that. As their preservation is critical to our state’s ongoing growth and long-term ability to compete, Texans should prevail on lawmakers at both state and local levels to adopt similar policies across-the-board.
Tags: ALEC, American Legislative Exchange Council, government, local government tax, property tax, taxpayer, Texas, Texas tax structure
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