Laboratories of Democracy


ACRU Staff


November 21, 2012

This column by ACRU General Counsel and Senior Fellow for the Carleson Center for Public Policy (CCPP) Peter Ferrara was published November 21, 2012 on The American Spectator website.

The lesson of the 20th century is that Marxism was tried and tried and tried, and failed and failed and failed. But that lesson is lost on the true believer Barack Obama and his Democrat Party. Supposedly a forward looking progressive, Obama is dragging America back into cutting edge ideas from the late 19th century, already proven wrong to everyone except those in Obama’s freeze dried corner of American culture.

What else can we make of the spectacle of our re-elected, conquering, Democrat hero president — the cultural progeny of a 1960s radical American rejectionist mother and the openly Communist Kenyan she embraced to be Obama’s father — demanding multiple, explosive, income tax rate increases to make “the rich” pay their “fair share,” even though those very same rich already pay virtually all federal income taxes? The 51 percent that re-elected Obama will soon receive a lesson in economics: the renewed recession, soaring unemployment, declining tax revenue, and record-shattering deficits that those foolish tax increases will produce.

America’s Rational Remnant

But there are oases of rationalism found in the 25 states now governed under total Republican control, with a Republican governor, state senate, and state house. America is conducting a national experiment on capitalism versus socialism among these increasingly partisan states. Compare the fiscal and economic performance, for example, of Democrat-controlled California, Illinois, and New York, to that of Republican-controlled Texas, Florida, and Virginia, not to mention Indiana and Wisconsin.

What can the Republicans do with this state control? They can remake the economic and political map of America. Here are the policies that state Republicans should pursue to get their economies booming even more:

Phase out State Income Taxes

There are nine states that prosper perfectly well with no state income taxes. In fact, the south is ringed with them: Texas, Florida, and booming Tennessee. That policy should spread across the remaining South, from Louisiana to Virginia, up the Plains states, following South Dakota’s lead, and to the rest of the West, joining Wyoming, Nevada, Washington state, and Alaska. The resulting economic competition will force the remaining states to abandon state income taxes as well.

A study by Art Laffer, Stephen Moore, and Jonathon Williams in the Rich States, Poor States volume published in 2010 compared the nine states with no state income taxes to the nine with the highest top marginal income tax rates. Over the 10 year period from 1998 to 2008, economic growth was 50 percent higher in the states with no income tax. Jobs grew more than twice as fast. Yet total state tax receipts still grew 30 percent faster in the states with no income tax. Faster economic growth powered their tax receipts higher.

Moreover, the authors studied the 11 states that adopted an income tax in approximately the previous decade. Their economies and total state revenues grew more slowly after the income tax was adopted.

To cite a direct example: Between 2002 (after the tech boom and the 9/11 recession ended) and 2008, Texas added jobs more than twice as fast as California. Real economic growth rose almost 50 percent faster in the Lone Star state, and real personal income grew 46 percent faster. And jobs in Texas grew more than twice as fast as in California.

Americans for Tax Reform reports from official IRS data that in 2007, the nine states with no income tax gained 235,000 residents from the other 41 states. Those residents took with them $11.8 billion of net adjusted gross income. The 10 states with the highest tax burden together lost 441,000 residents, who took with them $12.8 billion in income.

Phasing out state income taxes does not require eliminating everything in the state budget. It just requires limiting the growth of state expenditures to a level below the rate of state economic growth, and using the savings to cut the income tax rate until it is phased out entirely. A good place to start would be something like the Colorado Taxpayer Bill of Rights, which limits the growth of state spending to the rate of population growth plus inflation. This is a desirable limitation in itself, since it keeps per capita spending stable in real dollars. And as I demonstrate in my 2011 book, America’s Ticking Bankruptcy Bomb, that policy alone would allow income taxes to be phased out in every state within 10 years.

Right to Work

Laffer, Moore, and Williams also demonstrate that right to work laws provide a big boost to state economic growth. All right to work laws do is provide each worker with the personal, individual freedom to decide whether or not to join a union. That is just basic American freedom and fairness.

Paycheck Protection

Experience shows that where government employees are free to decide whether or not to pay union dues (just like any other membership fee), the great majority of them decide not to do so. That was the experience most recently in Wisconsin, where Governor Scott Walker gave public employees that freedom. The dramatic reduction in union income greatly reduces interference contrary to the will of the people by such government unions in the state’s free elections.

Government Employee Pension Reform

The unfunded liabilities for state and local pensions are realistically estimated as $3.8 trillion, equivalent to one-fourth the entire national debt, as currently calculated. Lavish pension plans provide for retirement as early as 55 after 30 years of service, with monthly benefits equal to 60 percent or more of the employee’s last salary. This is, on average, more than twice the average private sector pension of $13,100, on top of Social Security — and most private sector workers no longer have employer provided pensions in the first place.

Most government employee pensions are “defined benefit” plans, which specify a certain future benefit to be paid, based on some formula, regardless of how much money has accumulated to pay such benefits. These should all be reformed into “defined contribution” plans, in which the government provides a certain contribution to each worker’s pension, as defined by some formula, and future benefits are equal to whatever the contributions can finance. Defined contribution pension plans by definition involve no unfunded liabilities, or further obligations on taxpayers. Further, most government workers would gain from such plans, as the typical defined benefit plan favors the longest tenure worker at the expense of all the others.

If the government bureaucrat unions prevent such reasonable pension reforms, the answer is just to sharply slash the number of government workers, cutting unfunded liabilities to the same degree. States and localities can contract out services to private companies, which has a long, highly successful record in American government. The ultimate example is Sandy Springs, Georgia, a suburb of Atlanta, which has successfully contracted out all city services except the police and courts. Privatizing in this way would eliminate virtually all state and local unfunded pension liabilities.

Cut Counterproductiv
e Overregulation

Laffer, Moore, and Williams identify excessive, counterproductive state and local government overregulation and associated costs as another major factor retarding state economic growth. A major program of deregulation, similar to what President Reagan pursued at the federal level in the 1980s, should be adopted by every state that Republicans control.

Particularly harmful, Laffer et al. found, are state mandates that health insurance cover benefits favored by special interests, such as acupuncturists. Such mandates sharply raise the cost of health insurance and are effectively yet another tax on employment, further reducing such employment.

School Choice

School choice shifts power from the public school bureaucracy to parents, students, and families, which is why the bureaucracy and unions oppose it so strongly. Such reform creates a competitive market in education, replacing the current government monopoly. Parents and students have the power to determine where school funding goes, so schools, teachers, administrators, and the bureaucracy must be maximally responsive to their concerns and preferences, to win the market competition.

The reforms recently adopted in Louisiana under Governor Bobby Jindal are a model for such reform. Caps and barriers to charter schools should be eliminated. School choice tax credits should be adopted, at least for the poor and disadvantaged to start. This issue can help Republicans appeal to poor minority voters, who are rightly concerned about the poor quality of public schools hampering their children’s futures.

Remaking America

These reforms hold the promise of remaking the economic and political map in America, as pro-growth states rise to replace the over-the-hill, declining ones that pursue the defunct redistribution policies of the past. Moreover, people — and the resulting political power that comes with them — follow economic growth.

This is already happening. The South, from Texas to Florida, is rising as the new industrial base of the nation. The Northeast is in long-term decline and will be left behind the rest of the country. If upstate New York were its own state, it would be the poorest one in the union.

As Laffer, Moore, and Williams write:

With respect to the economic importance of the Northeast, all the data point to one conclusion: it is dying. The Atlantic states are suffering from a slow motion version of the economic paralysis now affecting much of Europe, particularly France and Sweden with their state-of-the-art, massive welfare systems. In 2007, the Northeast was home to a smaller share of the U.S. population than ever before; it had a smaller industrial base and produced a smaller percentage of America’s total value added than at any time in the nation’s history. For the rest of the United States — which has impressively restructured its economy for the challenges of the productivity-driven information age — the Northeast is not so much unnecessary as it is irrelevant. Today, most of America — competitive, capitalist and confident — observes the Northeast through its rearview mirror.

These fundamental economic realities will translate into fundamental political realities more and more over time as economic patterns translate into population patterns. Florida now has as many electoral votes as New York. Georgia has as many as Michigan, and almost as many as political powerhouse Ohio. Barry Goldwater’s Arizona has as many electors as George McGovern’s Massachusetts. Winning Texas alone nearly offsets losing Pennsylvania and Illinois combined. California did not gain any electoral votes after the 2010 Census, the first time its power did not increase since it became a state in 1850.

Liberal northeast media outlets can shelter their populations from competing points of view, as they have been so successful in doing for so long. But they cannot shelter their populations from reality. The Northeast intellectual elites are locked in a brain freeze circa the 1930s. If that freeze does not thaw, the rest of America, and even economically emerging nations abroad, will pass them by.



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