Tax Climate Index
It has been interesting to see some of the early results being published from the 2010 Census. Of particular interest were some results published in the January 3, 2011 issue of Businessweek Magazine. The article listed out all of the states that would be gaining or losing seats in the House Of Representatives as a result of their population going up or down from the last Census in 2000.
These results raise an interesting question: is it possible that those states that gained population and thus, additional representation in Congress, are also the states that place the lowest tax burden on their residents? In other words, do higher state taxes encourage residents of that state to move elsewhere for a better life style as a result of lower taxes elsewhere?
One analysis approach is to look at the correlation between House seats lost or gained and the tax burden in each of those states. One way to that is to use the latest state-by-state results from the Tax Foundation. The Tax Foundation published their latest annual results from their State Business Tax Climate Index in late 2010. Their index rank orders each state along five tax parameters, corporate income tax, personal income tax, state sales tax, state unemployment tax, and property tax. After ranking each state along each of these five taxes, they produce an overall index for each state.
Their overall index goes from 1 to 50. The state with an overall index of 50 is deemed by the Tax Foundation to place the heaviest tax burden on its residents. The state with an index value of 1 is deemed to place the lightest tax burden on its residents. Thus, if you combine the Census results from the Business Week article with the Tax Foundation work, you come up with the following:
States Losing Two Congressional Seats:
- New York – Tax Foundation Index = 50
- Ohio – Index = 46
Average Index Of States Losing Two Seats = 48
States Losing One Congressional Seat:
- Illinois – Index = 23
- Iowa – Index = 45
- Louisiana – Index = 36
- Massachusetts – Index = 42
- Michigan – Index = 17
- Missouri – Index = 16
- New Jersey – Index = 48
- Pennsylvania – Index = 26
Average Index of States Losing One Seat = 32
States Gaining One Congressional Seat:
- Arizona – Index = 34
- Georgia – Index = 25
- Nevada – Index = 4
- South Carolina – Index = 24
- Utah – Index = 9
- Washington – Index = 11
Average Index Of States Gaining One Seat = 18
Florida Is Gaining Two Seats – Index = 5
Texas Is Gaining Four Seats – Index = 13
A few observations:
- The Illinois index rating is now probably much worse than when the Tax Foundation did their report since the Illinois legislature significantly raised corporate and personal income taxes within the last week with personal income taxes going up 66%.
- New York lost another two seats this time around and according to the article, it is down from a high of 45 Congressional seats as recently as 1940 to only 27 seats now. The 27 seats are the lowest amount of seats for New York since 1810.
- While Louisiana lost a Congressional seat, there is a good chance that some of that loss was do to the lingering effects of Hurricane Katrina.
- New Jersey got as high as 48, after being at 50 for a number of years, only because it lowered its highest personal income tax rate, an action that would have affected only a very small number of New Jersey residents.
The obvious conclusion and correlation is that the higher your tax burden, the more population you lost, as measured by the change in Congressional representation. It is not a perfect correlation but it is a strong correlation.
This analysis represents a high “correlation” of high tax burden to lost population, you would have to go much deeper to see if there was a true “causation” relationship, namely high taxes “cause” population loss. For example, if you overlay the results above on a map of the U.S., you could make an inference that those states gaining population tend to be in the southern, warmer part of the country (with the exception of Louisiana which is likely affected by Hurricane Katrina). Those losing population tend to be in the northern, colder part of the country so maybe Americans just want to be warmer.
However, I would maintain that the taxes are much more causation than the weather. Many of the coldest states in the country, Minnesota, the Dakotas, Wisconsin, Montana, Maine, Vermont, New Hampshire, etc. did not gain or lose Congressional seats. If weather was a driving factor vs. taxes, one would have expected at least some of these cold states to have lost seats. Thus, I would assume that taxes and not warmth are much more important in driving population shifts.
Another way of looking at the data is to overlay the Congressional results above with the two major political parties, the Democrats and Republicans:
- If you look at the past five Presidential elections, every one of the states losing population and Congressional seats, except for Louisiana, would be considered blue states or Democratic states. Again, Louisiana’s status might have been unduly influenced by Katrina.
- Five out of the eight states that gained Congressional seats would have been considered red states or Republican states.
- Florida would have been one of those three states not considered Republican but since the last Presidential election, the state of Florida now has a Republican governor, both houses of the state legislature are controlled by the Republicans, in some of the past five Presidential elections Florida did go Republican, and I believe that Republicans picked up seats in the Florida delegation to the House Of Representatives while holding the Republican Senate seat it already had. In other words, Florida would probably now be considered a red state.
Thus, again we see a very strong correlation, this time between high population lost or gained and political party. Those states with a strong Democratic political influence tend to be the higher taxing states and the states losing people. Those with a strong Republican presence tend to be the lower taxing states and the states gaining people.
Thus, a very strong case can be made for a very simple premise: human beings like to keep what they earn and are likely implementing this premise with their feet, relocating to states where they can keep the results of their hard work. I know that is what my family did. We moved out of New Jersey in 2005, when its tax index rate was a horrendous 50, and moved to Florida. In 2005, more than five years ago, we were paying about $12,000 a year in New Jersey property tax, a taxation amount that is likely much higher than it was over five years ago. We currently pay less than $4,000 a year in property taxes in Florida, a savings of at least $8,000 a year. In Florida, we also have no income tax to pay vs. a pretty substantial income tax that we would have to pay in New Jersey.
Both myself and my wife did not necessarily want to leave New Jersey. We both grew up there, we spent most of our careers there, and we left behind friends and family. However, the price to stay put was just too much, probably in excess of $10,000 a year once you take in account all of the tax implications. You can live a much better live, a much freer life, if you have an extra $10,000 in your pocket.
Which gets us to the overall lesson from all of this analysis. The higher the tax burden, the less amount of freedom an American has. You cannot separate financial freedom from political freedom, they go hand in hand. The more you pay into the government, the less money you have for you and your family. You have less money to send your kids to a better school. You have less money to possibly start a business. You have less money to save for retirement. You have less money to donate to your favorite charity. You have less money to just enjoy your life. You have less freedom.
And it is not as if the government confiscates your hard earned money, money that you are now not free to spend as you like, and uses it for great programs that have a benefit to you and your family. It is typically wasted in ways to numerous to list here.
That is why downsizing the government’s size is so important. A reasonable, attainable goal would reduce the size of the Federal government by 10% a year by five years. The reason for this goal would be to reduce what government does so that the political class and the government it runs work on a smaller set of more important issues, and hopefully, by focusing on less getting more done.
Also, if you reduce the size and waste of government, you can eventually return those unused and unwanted taxes to the American people who have shown that they will look for the best economic deal for themselves and their families, and more freedom, even if it means moving to Texas, Florida, and other less tax heavy states. Who would have thought?