Anti-Business States Awash In Red Ink

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Shortly after he was confirmed as governor of New York earlier this year, David Paterson told a group of business executives that when he received congratulations from old friends he hadn’t heard from in years, he was surprised how many no longer lived in New York. "All of them basically said the same thing," Paterson told the group. "'Good luck in New York state, but we can't pay the taxes. The opportunities aren't there.'”

After that experience, Paterson presumably can understand the complaints of corporate executives recently surveyed by Development Counsellors International, which advises companies on where to locate their facilities. More than four in ten of them have ranked New York as the worst state to do business in--second only to California in unfavorable mentions. The most common gripes included high taxes and anti-business regulations. Joining New York and California on the list of most unpopular states were New Jersey, Michigan and Massachusetts.

The DCI study, coming as it did amidst growing talk of state fiscal crises around the country, is particularly revealing. Of the approximately $48 billion in accumulated budget shortfalls that the 29 states with projected deficits are facing, $33 billion, or two-thirds of the gap, is concentrated in those five states considered by corporate executives to be the least friendly to business. Meanwhile, among the five states ranked as having the best business environment, Texas and North Carolina have no projected budget gaps, and Georgia, Tennessee and Florida are facing shortfalls amounting to about $4.1 billion, or less than one-tenth of the states’ total.

An idealist would assume that those stark numbers would jump out at legislators in the most anti-business states and prompt a bracing re-evaluation of their spending, tax and regulatory regimes, as Paterson advocates. But no such luck. Paterson’s former colleagues in the state legislature are lobbying for a new tax on millionaires, while across the country California’s legislators have called for boosting the state’s top tax rate from 9.3 percent to 11 percent. Since many firms, especially small ones, are organized corporately in such a way that they pay taxes on profits at their owners’ personal income tax rate, any increase in the top rate of income taxes will hit small firms hard, to say nothing of the impact on the personal taxes of executives at big firms.

I’ve often heard people around the country say that voters in places like California, New York and New Jersey (which instituted its own ‘millionaires’ tax on those earning $500,000 or more a year several years ago) get what they deserve. But beware. States that have taxed and spent themselves into a bind want everyone else to pay for their excesses. Even as Gov. Paterson excoriated his former colleagues in the state legislature for failing to recognize the magnitude of New York’s budget problems, last week he traveled to Washington, D.C., to urge the federal government to help bail out the state. Paterson argued creatively that the rest of the country should come to his aid because the Empire State is home to the country’s financial markets and thereby contributes disproportionately to the America economy--although I can imagine that there are many states that would gladly take those financial institutions off of New York’s hands if the governor considers them such a burden.

Paterson also contended that states like New York deserve aid because they send more in taxes to the federal government than they receive in return in spending. This is an old argument that one often hears from pols not only in New York, but in New Jersey, California and Massachusetts. Based on an annual ‘balance of payments’ study sponsored by former Sen. Daniel Patrick Moynihan from 1977 through 1999, the study found that certain states were always big losers. But even Moynihan realized that those states were mostly responsible for their own plight, because their federal legislators had led the way in constructing a tax system that not only redistributed income from the rich to others, but also redistributed income regionally.

For instance, a study of the 1993 Clinton tax increase, which included a sharp rise in top income tax rates, found that the legislation cost the residents of California and New York $60 billion in additional taxes in the first year, mostly because of all those rich Wall Street and Hollywood types who got hit harder. Residents of one New York congressional district alone, on the East Side of Manhattan, paid more in additional taxes than taxpayers in any other district in the country—an increase of $3.4 billion, or 700 percent, in one year. And yet the congresswoman representing that district, Carolyn Maloney, and the majority of California’s and New York’s congressional delegations, voted in favor of the tax increase, which had been heavily advocated by economic advisor to the president and New Yorker Robert Rubin.

By contrast, most of the New York congressional delegation voted against the 2003 Bush tax cuts that saved New Yorkers $36 billion in federal taxes in the first year alone, according to a study by the Manhattan Institute’s E.J. McMahon. The difference, of course, is that the tax cuts left money in the private economy, not in the coffers of government, where the likes of Maloney could get their hands on it.

As the fiscal problems of some states increase, we are likely to hear more about how the federal government must bail them out. It’s the failings of the federal government (that is, the Bush administration), that are responsible for state budget woes, so the argument goes. But any look at the states with the biggest deficits reminds us that governors and legislatures are largely the authors of their own problems, and that the biggest trouble some of them seem to have is that their taxing and chronic overspending have made them toxic to the business community. Don’t ask the feds to fix that.

Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

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