Virginia’s economic performance has been mediocre over the past 10 years compared to that of other states, finds the 2018 edition of “Rich States, Poor States,” but the Commonwealth’s public policy mix gives it an economic outlook rank of 10th best in the nation.
The “Rich States, Poor States” economic competitiveness rating reflects the analytical viewpoint of supply-side economists Stephen Moore and Arthur B. Laffer and gives heavy weight to tax burden, public indebtedness, size of state bureaucracy, and traditional business-climate factors such as right-to-work and average workers’ compensation costs.
Many other factors influence a state’s prospects for economic growth, such as industry mix, education and skill levels of the workforce, entrepreneurial vitality, cost of living (particularly housing), and the quality of government services. Even so, the attributes identified by “Rich States, Poor States,” now in its eleventh year of publication, clearly have considerable value in explaining differential rates of population and economic growth.
Laffer and Moore elaborated upon the importance of tax burden in a Wall Street Journal column today, in which they made the case that the capping of State and Local Tax (SALT) deductions will accelerate the movement of businesses and people — especially wealthy people — from high-tax blue states to low-tax red states. States with the highest, most progressive tax tax burden like California and New York, they predicted, will be the biggest losers. Conversely, low-tax states will be the biggest winners.
About 90% of taxpayers are unaffected by the change. But high earners in places with hefty income taxes—not just California and New York, but also Minnesota and New Jersey—will bear more of the true cost of their state government. Also in big trouble are Connecticut and Illinois, where the overall state and local tax burden (especially property taxes) is so onerous that high-income residents will feel the burn now that they can’t deduct these costs on their federal returns. On the other side are nine states—including Florida, Nevada, Texas and Washington—that impose no tax at all on earned income.
Laffer and Moore did not discuss Virginia specifically, but according to the “Rich State, Poor State” methodology, the Old Dominion has a favorable tax and business climate. Hence, all other things being equal, economic performance should fare better looking forward than it did over the past 10 years when budget sequestration and defense spending caps squeezed the Northern Virginia and Hampton Roads economies.
I would caution against making any judgments regarding short-term performance based on these numbers. Federal spending is the No. 1 economic driver in Virginia, and the state’s fortunes rise and fall to a considerable degree depending upon the vagaries of federal budget policies. Right now, Uncle Sam is in spendthrift mode, so that augurs well for us. But, as I frequently warn, what can’t go on forever… won’t. At some point, the federal spending spigot will close.
Rather, tax and business climate factors make a difference over long periods of time. They facilitate a steady drip… drip… drip… in the migration of corporate and human capital from state to state, metro to metro. A perfect example is the recently announced relocation of Gerber Products Company of its U.S. headquarters from New Jersey to Arlington. The company will invest $5 million and create 150 jobs. By itself, that one move is not terribly significant given the huge scale of the Northern Virginia economy. But if the corporate migration from New Jersey and New York to Northern Virginia is entirely one way — and it is — small investments add up over a long period of time.
Leave a Reply
You must be logged in to post a comment.