Monday, December 27, 2010

Taxes and Population Loss: An Educational Exchange

Our post last week on the correlation between NY's population loss and its high tax environment, stimulated an email exchange that we thought might prove enlightening. The three individuals who responded are all extremely well versed in the economic impact of government tax and regulatory policies: Erik Engquist from the Crain's Insider; E. J. McMahon, Senior Fellow for Tax and Budgetary Studies, at the Center for Civic Innovation at the Manhattan Institute, and Steve Malanga, also a Senior Fellow at the Manhattan Institute.

First up is Engquist:

"Rule Number One of statistics: correlation is not causation.

So your conclusion that "low taxes = population gain" requires more evidence and explanation than you and John Faso give. It also begs the question of whether population gain is always good. It is arguably proving to be unsustainable in places like Nevada, where an economy that relies so heavily on population growth has run into major difficulties (foreclosures, etc.), and where drinking water is not easy to supply. Such states's economic models present short-term and long-term conundrums.

I'm not saying New York doesn't have its problems. And I agree with Faso that NY shouldn't have to dole out business tax breaks one at a time. But to idealize the fastest-growing states is naïve. Florida, too, provides a cautionary tale.

Below are two excerpts from

According to U.S. Commerce Department data analyzed by the Fiscal Policy Institute, though, New York ranked 24th among states in per-capita income growth from 1999-2009, with a figure that was slightly higher than the national average. Among the 10 states whose populations grew the most, only Texas surpassed New York in that category. The fastest-growing state, Nevada, ranked 48th in per-capita income growth.

David Epstein, a professor of political science at Columbia University, says New York’s population growth is low because people are leaving upstate, even as New York City’s population edges upward. The tax burden upstate is largely from property taxes, but income taxes are lower than in the city.“The problem in upstate New York is not high taxes, it’s that it’s full of old, Rust Belt-type cities that are trying to reconfigure themselves for the new economy,” Mr. Epstein said. “It’s not a taxes issue. It’s a matter of economic planning and development.”

To which McMahon responded:

"Sure, "low taxes=population gain" is obviously a simplistic way of summing up the census results.  However, your counter-arguments don't seem to prove anything in particular.  For example, I'd suggest that NY owes its (slightly) better-than-average 1999-2009 per-capita personal income growth largely to a phenomenon that FPI usually bemoans: the income boom on Wall Street.  Take that away, and we're much worse. 

Like upstate New York, the states of Minnesota and Wisconsin are also "full of old, Rust Belt-type cities that are trying to reconfigure themselves for the new economy."  But these states (which also have winter weather like upstate NY's) gained population during the past decade, while preliminary estimates would indicate the total upstate NY population was shrinking.   Only sickly Michigan looks as bad as upstate NY.

Moreover, downstate NY's population growth masks a large and continuing out-migration flow to other states; these departing New Yorkers have been replaced largely by foreign immigrants and their US-born children.  NY had the lowest rate of population growth in the northeast, which in turn was the slowest-growing region of the country.  Are we supposed to believe this is entirely "a matter of economic planning and development"?  (I'm not sure a Columbia pol-sci guy is the best authority on upstate NY's economy, in any case.)

I never heard anyone suggest we try to emulate the tourism-and-gambling driven economic model of Nevada, much less Florida.   But we really might want to start wondering why NY's 2% net gain can't hold a candle to those of Indiana (6.6%) or Missouri (7%).   Taxes aren't the whole story, but it seems apparent that taxes are a big part of it.

 And finally Steve Malanga:

"Actually, there is a rich literature of peer-reviewed academic work that demonstrates over the years that states with high tax rates inevitably generate slower economic growth through outmigration of capital and then jobs. People follow. It is incumbent that policy makers [and reporters] be familiar with this economic work as the state debates its future.

The literature and the process it describes was perhaps best summed up by Nobel Prize Winner Joseph Stiglitz (hardly a conservative), in his textbook, Economics of the Public Sector , when he wrote:

“A community that increases the taxes it imposes on capital will find that it attracts few investors. If as a result of the tax on capital the productivity of workers is decreased, wages will be lowered.  But then, in the long run, workers will emigrate.   The workers who remain “will bear some part of the burden of the tax on capital.  Their wages will be reduced as a result of the outflow of capital.  Dramatic consequences may result if these considerations are ignored.  Occasionally states have attempted to impose special taxes on particular industries.  Some industries are especially ‘footloose.’  These industries will move out if higher taxes are imposed on them.  They will shop for states and communities that offer the best deal.”

What is this literature that prompts such a declaration from Stiglitz? Some of the recent summaries of work on state taxes and economic activity includes:

 “The Effect of Personal Income Tax Rates on Individual and Business Decisions - A Review of the Evidence” by Mark Rider, an April 2006 working paper published by the Andrew Young School of Policy Studies at Georgia State University.    Conclusion: “In summary, there is a large body of evidence that high state PIT rates have a negative effect on business and individual decisions and thus slow the growth of state employment and personal income.   Consequently, states must use care in setting PIT rates top make sure they are not out of line with those of their neighbors and competitor states.”

“Do State and Local Taxes Affect Relative State Growth?” by Zsolt Becsi, published by the Federal Reserve Bank of Atlanta in its Economic Review of March/April 2006.  Key finding:  “The study finds that relative marginal tax rates have a statistically significant negative relationship with relative state growth averaged for the period from 1961 to 1992.”

  “Can State Taxes Redistribute Income?” by Martin Feldstein and Marian Vaillant Wrobel, Journal of Public Economics 68 (1998).  Summary: “Since individuals can avoid unfavorable taxes by migrating to jurisdictions that offer more favorable tax conditions, a relatively unfavorable tax will cause gross wages to adjust until the resulting net wage is equal to that available elsewhere … The adjustment of gross wages to tax rates implies that a more progressive tax system raises the cost to firms of hiring more highly skilled employees and reduces the cost of lower skilled labor. A more progressive tax thus induces firms to hire fewer high skilled employees and to hire more low skilled employees.”

Local Revenue Hills: Evidence from Four U.S. Cities, by Andrew F. Haughwout, Robert P. Inman, Steven Craig, Thomas Luce, NBER Working Paper Series, 2003.    Key finding: “Estimates of the effects of taxes on city employment levels for New York City and Philadelphia  … show [their] local income and wage tax rates have significant negative effects on city employment levels. Cuts in these tax rates are likely to be an economically cost effective way to increase city jobs.”

The process of how this diminishment works is apparent in the recent study by EJ and Scott Moody of the National Establishment Time-Series which showed that NY lost the most jobs to outmigration of any state in a 15 year period, and also lost substantial jobs to an imbalance of new company births vs. deaths of firms and expansions vs. contractions." 

While the experts might disagree on the degree of high tax causality that underlies the NY out migration, most will agree that the state's high tax structure, unwieldy overlapping governmental jurisdictions, and dysfunctional political culture have resulted in NY's current dismal economic and fiscal conditions. As we said last week-and we'll give ourselves the last word, while thanking our experts for the educational exchange:

"In order to be able to accomplish this drastic restructuring-and re-imagining-of New York's political culture, Cuomo's going to need lots of help. The "conservative" forces of the status quo, and their legislative allies, are going to have their long knives out-and they will be sharpened. The small business community-battered and bruised in this state-is ready to enlist in this battle for survival.

We're just glad we finally seem to have a chief executive who understands how Albany sclerosis and a big government mindset has crippled the ability to make a go of it here. We are ready to fight side by side with Andrew Cuomo in his effort to demonstrate that New York State is, once again, open for business."