by James A. Bacon

The 50 states of the republic are conducting a fascinating, real-world  experiment in tax policy. The Democratic-dominated “blue states” are jacking up income taxes while some Republican-dominated “red states” are shifting the tax burden from income to consumption taxes. Which gambit will prove the most enduring path to prosperity?

Joel Kotkin, writing for NewGeography.com, sees the blue states as doubling down on a suicidal strategy that will drive out the middle-class and the well off, hollowing out their tax bases in the process.

If you’re part of the Silicon Valley or Manhattan wealth-creation clusters, it’s worth staying put no matter how high the taxes. But if your business is not tightly bound to an industry-specific ecosystem, you have every reason to flee. Between 2006 and 2009, Kotkin writes, California lost a net 45,000 taxpayers earning between $5 million and $300,000 a year.

“To be sure,” he writes, “the outward movement slowed during the recession, but more recently the pattern has reasserted itself. Last year, all ten of the leading states gaining domestic migrants were low-tax states including five with no income tax: Texas, Florida, Tennessee, Washington and Nevada. In contrast high-tax New Jersey, New York, Illinois and California suffered the highest rates of out-migration.”

Federal Reserve Board policy is propping up the blue-state economies right now, Kotkin suggests. Low interest rates are flushing money out of fixed-income investments into stocks and real estate, driving up prices, enriching the wealthy and creating a boom in capital gains income. (If you want to know why the income gap continues to widen during the Obama administration, you need to look no further. The Obama/Bernanke policy is immiserating small savers, who earning next to nothing on their bank CDs and money market funds, while enriching those who own stocks and real estate.)

Higher income taxes serve as an equivalent to what economist Suzanne Trimbath calls ‘fiscal crack.’ For a short period there’s euphoria, as tax revenues flow in and the economy seems to recover. Yet the real problems, such as inadequate private-sector job growth, are never addressed, and as the high fades, the state again faces a loss of jobs and people.

All bubbles eventually collapse. The Fed cannot maintain its zero-interest rate policy forever. Eventually, interest rates will rise, depressing stock and real estate prices. Blue-state tax revenues, which are disproportionately dependent upon cyclical revenue sources like capital gains, will plummet. And the blue states, having already driven out many productive taxpayers, will have nowhere to turn.

Virginia is sitting on the sidelines of income tax reform, content to keep its top rate at a moderate 5.75%. In a world in which high-earning (and taxpaying) individuals are as mobile as ever, the Old Dominion is positioning itself as neither a winner nor a loser.

Instead, Virginians are consumed by the need to raise tax revenue for transportation. The General Assembly has made the decision to raise taxes; the only question now is whether to go with the House version, the Senate version or some hybrid of the two. Unfortunately, the move to raise taxes is not accompanied by any effort to demand more accountability for the transportation dollars we spend. By enacting higher taxes to pay for projects offering dubious economic payback, Virginia is inching toward the blue-state governance model. We don’t have the worst tax regime in the country, but ours is far from the best.