by Rex Sinquefield Forbes.com Contributor
Anyone who doubts that state leaders are looking for ways to compete with their neighbors need not look any further than the state of Idaho.
Long a beacon for outdoorsmen, the state’s natural offerings are second to none. From the majestic beauty of Twin Falls, to kayaking and trout fishing on the Snake River, to world-class skiing in Sun Valley, Idaho attracts hundreds of thousands of tourists annually. Just as impressive, the state now boasts 14 business incubators, rates number-one in the country for business patents, and was awarded an A+ rating for Small Business Friendliness (as well as named the seventh most inventive state) by the Kauffman Foundation. In 2013, the ALEC-Laffer State Economic Competitive Index reported that competition is alive and well in the Potato State. Between 2008 and 2013, Idaho’s ALEC-Laffer ranking went from tenth to seventh.
By Rex Sinquefield, Forbes.com Contributor
The Sunshine State’s Governor Rick Scott is turning the heat up in the jobs battle between the states with his “One Way Ticket to Florida” public relations campaign. In a meeting that I had with him last week, Governor Scott made it clear… he is proudly and unabashedly taking a page out of Texas Governor Rick Perry’s “TexasWideOpenforBusiness.com” playbook. His goal is to lure employers away from less business-friendly states. So far, Scott has sent letters to business owners in high-tax states, including California, Colorado, Illinois, Minnesota, Massachusetts, New York, and my own home state of Missouri.
In Missouri, Governor Jeremiah “Jay” Nixon opened the door for Scott’s recruitment activities last summer when he vetoed the first state income tax cut bill passed in the legislature in nearly 100 years. As Missouri legislators were debating whether they would override the Governor’s veto, Gov. Scott sent a letterto Show Me State businesses encouraging them to move to Florida and pointing to the many economic advantages that can be found there, including.
- An unemployment rate below the national average
- Fewer business regulations
- 370,000 new private sector jobs added in the last two years
- A Tax Foundation report ranking Florida among the top five most business friendly states, while Missouri ranks a tepid 16.
And Scott is set to do even more to boost Florida’s economy. This year, he is proposing that Florida’s recent gains should be used to fuel even more growth. In January, Scott laid out his “It’s Your Money Tax Cut Budget.” This forward-thinking plan promises to return $500 million in taxes and fees to families and businesses. Just as important, Scott wants to cut government waste by nearly $290 million, and pay down more of the state’s debt by $170 million.
If Scott is successful in passing this proposal, taxpayers would save $400 million through the elimination of annual automobile tax and fee increases, save another $100 million by reducing taxes on commercial leases (Florida is the only state in the Union that imposes such a tax), increase the number of businesses that are exempt from business income tax (which will save more than $20 million in taxes), and reduce business filing fees by $33 million.
The plan also sets aside $5.1 billion in reserves while investing a record high of nearly $19 billion in K-12 education.
Florida’s warm winter months, beautiful beaches, family entertainment centers, and rich cultural history have long been a draw for family vacations. In fact, Florida is the top travel destination in the world. In 2012, a record-setting 89.3 million visitors came to the state.
Given Gov. Scott’s commitment to putting more money in the hands of hardworking families and business owners, Florida may soon become the top destination for employers and workers, as well.
Olympic-Style Race Lights State Tax Reform Torch
The governors of Wisconsin, Kentucky, and Oklahoma are taking the lead in the 400 meter dash toward state tax reform this legislative session. Each of these heartland leaders decided that this is his race to win, and each is determined to bring home the gold in economic expansion.
Leading the pack is Wisconsin Governor Scott Walker. His bold leadership style set the stage for an economic turnaround that is attracting businesses and jobs. Walker’s primary focus is on “organic” job growth, which means helping startups and small businesses grow. Walker catalyzed this growth by reducing overall tax rates, corporate income taxes, and property taxes. Similar measures in the past have pole-vaulted Wisconsin’s ranking up several notches with improvements in key economic indicators, such as access to capital, business friendliness, and workforce. At the same time, the state’s bond rating is positive and pension system is fully funded.
A remarkable turnaround, considering Wisconsin had to rebound from a $3.6 billion deficit.
In his first thousand days in office, Gov. Walker reduced Wisconsin’s tax burden by $1.4 billion, which helped grow the local economy by attracting businesses and jobs. Walker already has surpassed his goal of creating 10,000 new businesses by 2015, with 13,000 new businesses created and the promise of many more to come.
Recently, Gov. Walker added a new tax cut proposal that uses the state’s $912 million budget surplus to cut income and property taxes.
Through his Blueprint for Prosperity proposal, Gov. Walker lays out a plan that allows taxpayers to keep more of their wages and creates incentives and educational opportunities for workforce training.
Walker’s tax cut plan would change withholding schemes and cut property and income taxes, returning $800 million to workers.
Five hundred clicks due south of Wisconsin, Governor Steve Beshear of Kentucky is feeling the pressure of lower tax rates in four neighboring states and is offering a tax plan that, while less aggressive that Walker’s, provides a 22-point plan dubbed “Kentucky Competes.” The proposal reduces the number of tax brackets and lowers top tax rates to 5.9 percent from 6 percent. For low-wage earners who might see a small increase in taxes, Beshears offers a Hold Harmless Tax Credit. The plan also expands the state sales tax to include professional services and taxes admission to campgrounds, golf courses, country clubs, and fitness centers. He also proposes a variety of tax incentives for angel investors, the New Market Tax Credit program, and the state’s Research and Development Tax Credit.
Recognizing the political brouhahas that often accompany tax reform measures of this kind, Beshear called on the state legislature to find common ground when he presented the “Kentucky Competes” plan, leaving the door open for the state’s Senate and House to offer up their own plans for tax reduction.
In Oklahoma, Governor Mary Fallin is keeping a watchful eye on the neighboring state of Kansas, which already is seeing the magic that is made possible through broad-based tax reductions. Governor Fallin is taking a second run at cutting the top income tax rate, proposing a gradual reduction, over the next four years, to 4 percent from its current rate of 5.25 percent.
Currently, the nine states that do not impose income tax on work have shown remarkable growth. For years, they managed a formidable lead in this winner-take-all competition for businesses and workers. In the years to come, with leaders such as Walker, Beshears, and Fallin closing fast, those same nine states may find new competitors on their playing field.
The conflicting tax policies that are being adopted in Blue and Red States across the country are providing economists, elected officials, and most importantly voters, with front row seats to a fascinating experiment. The outcomes of this experiment will give observers a multi-billion dollar answer to the question, “Which tax structures create sustainable economic growth for all, rather than support the special interests of the few?”
One thing we know for sure, people who have the capacity to move, will leave poor performing states with lackluster economies and move to states with vibrant and sustainable growth. They will head to states where they can find employment or more successfully grow their businesses, are able to keep more of their hard earned wages, and enjoy the enormous benefits of sustainable job growth and economic vitality.
One of the key states to keep an eye on is Indiana. Beginning with the days of former Indiana Governor Mitch Daniels, through current Governor Mike Pence, The Hoosier State’s pro-growth, free-market policies have significantly improved its business and employment climate. Just this week, a proposal by State Senator Brandt Hershman that would continue the gains made over the last decade, passed out of a Senate committee.
If signed into law, the state’s corporate income tax rate will drop from 7.5 percent to 4.9 percent over five years. It also would provide a $25,000 exemption in business personal property, which Governor Pence has suggested might be even better to phase-out all together.
These tax cuts, which benefit all businesses, would be paid for through the elimination of tax credits that benefit the few. This chart shows the Tax Foundation’s Tax Climate Rating for Indiana before the passage of the Hershman proposal (the 2014 column) and after (as indicated in the column on the right):
Indiana State Business Tax Climate Index Rankings Under Hershman’s Senate Bill
The negative impact of corporate taxes is clear. The cost is passed onto to consumers via increased prices for goods and services, to stockholders through lower dividends, and to employees in the form of lower wages. Conversely, lowering or eliminating business taxes leads to capital reinvestment in equipment, job creation, higher wages, and the kind of economic prosperity that workers, investors, and employers deserve. This chart, provided by the Tax Foundation, provides great insight into the benefit of lower corporate taxes. When combined with lower individual tax rates, the effect is even more impressive.
Setting the best state tax policy is going to take strong leadership, an adherence to principles, consistency in policy initiatives, and a solid sense of what will benefit all of a state’s constituencies. Political leaders across the country need to look no further than the state of Indiana for a practical guide to success.
By Rex Sinquefield, Forbes Contributor
The Wall Street Journal reports that New York City Mayor Bill de Blasio is laying down the gauntlet on the issue of income tax increases. He is determined to increase taxes on high wage earners, even if the state legislature does not fund pre-K education. Clearly, de Blasio’s plan is one of the more aggressive, and likely most harmful, political moves in the grand tax experiment between the states. The stakes are high, and Mayor de Blasio is betting that raising income taxes on successful workers and entrepreneurs will not push them to warmer, friendlier climates.
As reported by the New York Times late last year, New York is falling fast in its state population ranking, and could very likely fall to fourth place this year, while the no-income tax state of Florida moves up a notch to third place. All eyes will be focused on this data, as it seems to carry with it a real threat to the stability of the state’s economy, along with the potential loss of even more congressional seats to growing states such as Florida.
At the center of the state income tax debate are those who believe in increasing taxes and redistributing wealth to low-income workers and the unemployed. Unfortunately these same policies discourage business growth and job creation. On the contrary, encouraging economic inclusion for all is best served by reducing income taxes. The most efficient and effective road to job growth is designing and implementing a system that broadens the tax base, lowers tax rates, and provides opportunities for workers and employers to accumulate and spend financial resources, ultimately leading to economic growth and more job creation. Policymakers and voters would do well to seriously consider which approach would successfully tackle the issue of joblessness in their own states.
Solid new evidence released this month by the nonpartisan Tax Foundation supports the position that reducing income taxes encourages job creation and correctly lays out the best path to economic inclusion. The report’s release comes at a very critical time: The experiment in tax policy looks to be gaining even more momentum this year. In addition to the 18 states that passed meaningful income tax reform last year, more governors and legislatures are gearing up to make their states competitive in the drive to attract workers and businesses in 2014.
In my home state of Missouri, legislators are reworking the tax reduction proposal that they passed last session, only for it to be vetoed by Governor Jay Nixon. According to a recent news account, a handful of tax reform ideas will be considered this year. Several Republican legislators are working closely with the Governor’s office to find common ground by revising last year’s defeated proposal. There also is a plan being promoted by Democrats that will cut income taxes for all those making less than $300,000 per year. The latter is clearly the least desirable measure as currently written; that is, if Missouri wants to compete with its neighbor to the west, the state of Kansas, which enacted comprehensive income tax reform in January 2013.
One can only hope that Governor Nixon is paying close attention to the tax changes leaders in Alaska, New York, Nebraska, Kentucky, and Oregon are considering. There’s a grand experiment taking place in the race for job creation, and the states that ignore what’s happening around them will fall behind if they’re not careful.
The economy of the State of Nebraska is a shining star on many fronts. According to the state’s Department of Economic Development website, in 2011 Nebraska ranked 1st in the country in the lowest combined debt and pension liabilities, was the 3rd best state for job seekers, 9th in growth and innovation, 5th in pro-business legal climate, 5th most pro-business climate and 2nd best run state, along with achieving top ten placement in many other categories that address quality of life, leadership and growth in emerging industries and workforce training.
And yet, in true Nebraska form, state officials continue to look to their laurels to improve the lives of their hardworking citizens. Just as 19th century settlers transformed this barren land from near desert conditions to become the breadbasket to the world, the Cornhusker State is considering ways to transform their position in the battle to attract well-paying jobs and highly qualified employees.
Key to its 21st century transformative vision is the Nebraska tax reform debate, which is slipping into high gear. A joint report released earlier this month by the Tax Foundation and The Platte Institute for Economic Research, Building on Success: A Guide to Fair, Simple, Pro-Growth Tax Reform for Nebraska, proposes several well thought-out options for how to improve opportunities and secure the state’s competitive advantage.
Options include increasing the personal exemption from $6,100 of $7,500 per person for low income earners, reducing the top rate for individual income tax from 6.84% to 5.5% to bring it in line with neighboring states, and flattening the corporate income tax rate to 5.5% across all business types while reducing tax incentives to mirror the lowered rate. Certain triggers would cut corporate rates to 4% and then 3% when the state reaches revenue goals. Other options include capping property taxes, which are currently among the highest in the country and three options for broadening the sales tax base.
While the scenarios laid-out in the report’s Action Plan seem fair and reasonable, flawed thinking is found in the details of the individual income tax option. While simplifying the tax code by reducing the number of tax brackets from four to two, this plan retains a progressive PGR +0.19% imposition of taxes on those earning above $35,000.
A better approach is to flatten out the rate for all workers with the exception of low-income earners. Distortions that occur with progressive tax rates are detrimental to growth. Flattening the tax code offers several real advantages for taxpayers and a state’s economic stability, such as transparency, simplicity, cost savings in tax preparation, and removing the temptation to game the system.
Progressive taxation is seen by some as the easier approach, politically. But in reality, progressive tax codes hinder future reform measures because lower income brackets have no incentive to vote down the rate applied to top earners.
In my own home state of Missouri, our flat rate of 6% is applied beginning at $17,200 ($9,000 income plus the standard deduction and personal exemption), so all taxpayers have the shared incentive to lower rates across the board.
If Nebraska’s leaders are committed to their vision of real, sustained growth, they will consider modifying the proposed personal income tax option by removing progressivity in favor of a system that encourages success rather than punishing it.
“In an efficient market, at any point in time, the actual price of a security will be a good estimate of its intrinsic value.” - Eugene Fama
On October 14, Eugene Fama was one of three U.S. economists recognized by theRoyal Swedish Academy of Sciences and awarded the 2013 Nobel Memorial Prize in Economic Sciences for work in the area of “trendspotting in asset markets.” Fittingly, Fama is recognized worldwide as the leader of the empiricism that proved the fundamental truth that markets work, at least in the financial markets.
This idea was first conceived by Adam Smith and published in the groundbreaking 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations, which outlines topics that were critical to the new dawn of the Industrial Age, such as productivity, labor and free markets. Next , the 20th century benefited from the wisdom and insight of Friedrich Hayek, who took Smith’s ideas a step further with his work on economic fluctuations, money theory and the influential concept that prices are a reflection of all of the available information.
But, it was Fama’s empirical studies that led to his development of the efficient-market hypothesis (EMH), which illustrates, unequivocally, that the price of an asset is an accurate reflection of all available information. Fama now is known as the father of efficient markets and his vast body of work is influencing public policy around the world.
Fama’s seminal work in the area of efficient markets was published during the time when I was one of his budding graduate school students at the University of Chicago. The Efficient Capital Markets: A Review of Theory and Empirical Work, which appeared in the Journal of Finance in 1970, introduced the EMH concept that led to the creation of the index fund, now the world’s most popular form of investment. This same theory informs not only private and institutional investment decisions throughout the world, but also is used to determine economic policy and financial regulations.
Tuesday’s Wall Street Journal Op-ed, Nobels and National Greatness, declared that “A culture of individualism and an ingrained respect for against-the-grain thinking,” is essential to America’s position as home to the greatest number of Nobel Prize winners.
Clearly, Eugene Fama is a true American icon. The influence of his research and against-the-grain thinking is far-reaching. For investment purposes, the implication of the EMH is that the best strategy is to avoid the temptation to stock pick. Accept the market returns that exist, they are high and they are for the taking. The implication for policymakers is similar. Government should not be in the business of picking winners and losers and using taxpayer dollars to back their bets. If markets work, then markets work. It is just that simple. If seasoned investors can’t outguess markets, then government officials should not try to do so either.
I am sitting atop a limestone bluff overlooking the Osage River at my home in Folk, Missouri, and it seems as if the only way to get Congress to reform this country’s tax code is to ask for an intervention by the Great and Powerful Oz. But, here in the nation’s heartland, results from an experiment in state income tax policy just might provide other states with a roadmap to real growth.
You may recall from a past Forbes column by me that laid out the landmark legislation signed into law one year ago by the forward thinking Kansas Governor Sam Brownback. Brownback’s tax plan flattened and simplified the tax code, cut personal income tax rates for most earners from 6.45% to 4.9%, and got rid of small business income taxes.
Gov. Brownback’s singular goal was to grow the economy of his state. At the time Kansas had the second highest tax burden in the region, a cash balance of less than $1,000, a projected deficit of $500 million and an unemployment rate of 6.9%. In addition, 73% of the counties in Kansas had witnessed a decline in population.
Instead of continuing to watch billions of dollars in Net Adjusted Gross Income leave Kansas to other states, such as Florida, Texas and Tennessee (all no-income tax states), the legislature and governor identified and seized the opportunity to increase its competitive advantage with neighboring states. It was a bold politicalmove to say the least, but an idea that ultimately struck a chord with politicians, employers and workers across the state.
Just one year later, a close look at the data backs up the economic projections of Brownback’s visionary leadership. Lower income tax rates have in fact stimulated the economy by reducing the price both of work and conducting business in the state, not to mention that lower rates have predictably proven effective when it comes to luring out-of-state businesses to Kansas’ friendlier business environment.
A progress report issued recently by the state’s former budget director, Steve Anderson, one published in the Kansas City Star, shows many indicators of improvement. According to Anderson, the state’s cash balance has risen to $585 million today and they are projecting a surplus in 2014 of nearly $510 million. In addition, the unemployment rate fell from near 7% to 5.8%, as 45,000 jobs were created and the state’s population grew by 27,000. All this while the state reduced the tax burden on workers to the second lowest in the region, and handed just under $250 million back to workers.
And just how have these changes improved Kansas’ position in competing against its neighboring, higher income tax states? According to Anderson, “The Kansas portion of the Kansas City Metro area gained 9,500 jobs from May 2012 to May 2013 while the Missouri side registered no change in total nonfarm employment over the year. Employment on the Kansas side of the metro area reached 454,800 and surpassed the all‐time high of 452,800 recorded in June 2008.”
Back in Missouri, members of the legislature, along with business leaders from around the state, have taken the time this last year to understand the issues surrounding competitive tax policy and the related opportunities for long-term economic growth. In fact, a new coalition called Grow Missouri, composed of business advocacy groups, grassroots organizations, agriculture associations and others is demonstrating the diversity of support for tax reform there.
The Show-Me-State now has real data, made available from our neighbor to the west, which can be used as a reference this coming legislative session. It’s now up to Missourians to create the best tax policy for our own state’s economic growth.
School districts around the country are experiencing a mass exodus of teachers and principals. As reported in this NPR story, this year, nearly 20 percent of Milwaukee’s public schools have hired new principals.
In my own home state of Missouri, St. Louis Public School District lost 50 teachers, many of whom resigned after the first day of class. And the situation appears to be getting worse each year. According to St. Louis Post-Dispatch Education Reporter, Elisa Crouch, the number of those fleeing this troubled system is about 30 percent higher than in previous years.
This phenomenon is taking place across the country with school leaders and classroom teachers departing for better work environments. Just as in the business world, when organizational leaders, and the policies they create, fail to provide a successful work environment, employees depart for greener pastures.
In fact, some of these educators are looking toward teaching in charter schools, higher performing/better paying public schools within the district or neighboring districts, private schools and in some cases, jumping ship entirely to teach in other countries.
And just what are our schools doing to recruit top-notch teachers to replace the exodus?
“There are a lot of people coming to the district who can’t cut it,” said Mary Armstrong, president of St. Louis American Federation of Teachers Local 420 in a recent interview. “People aren’t breaking down the door to come to St. Louis Public Schools to work.”
One has to ask: Isn’t there a better way to run a district? Isn’t it time that school leaders be given the opportunity to create an environment that allows them to recruit teachers who are best suited for their student population?
In a recent survey of Missouri school superintendents, conducted by the Missouri-based free-market think tank, the Show-Me-Institute, more than 90 percent of superintendents surveyed favor teacher tenure reform. More than 70 percent say that it is very difficult and costly to get rid of bad teachers. In fact, Randi Weingarten, the head of the American Federation for Teachers, has publicly stated that the time has come for tenure reform.
According to a report in Education Week, in the 2011 legislative session, 18 states passed legislation that changed teacher tenure, and in many cases the language of the new laws varies significantly. From Alabama to Wyoming, some states are realizing that teacher quality is the most important factor in student performance.
In Missouri, most superintendents agree that they would be in favor of reforms that protect high performing teachers from personal vendettas by elected school board members but they also want reforms that will help them fire underperforming teachers.
The tide is turning on the issue of K-12 tenure reform and it may just be the most critical factor in our schools’ ability to hold onto great teachers.