I’ve read Governing magazine, a monthly publication of Congressional Quarterly, even since it was created 16 years ago. Although too often representing and promoting an establishment (read liberal) view on what state and local governments should do and how they should do it, the magazine has made gestures over the years towards fairness and taken notice of the rise of free-market, conservative ideas and lawmakers during the past decade.
Too bad that Governing’s latest project, a ranking of the tax codes of all 50 states, has tossed aside any reasonable standard of fairness. Also too bad is the copious amount of press attention received by the project — which was done jointly with the Pew Center on the States — from news media outlets in North Carolina and across the country. Because so many states are experiencing yet another year of fiscal distress, those advocating new rounds of tax increases, or tax “reforms” that amount to the same thing, have seized on the Governing report in their respective states to “prove” that taxpayers are keeping too much of their own money, those greedy bastards.
The February 2003 issue of the magazine is largely devoted to the rankings, which devote a page to each state and grade them on three different variables: 1) adequacy of revenue, 2) fairness to taxpayers, and 3) management of the system. Although the authors, in introducing the rating system, acknowledge that “there are always hazards to an effort like this one,” they seemed to have made conscious decisions to maximize those hazards by importing political bias into the ratings.
For example, under “adequacy of revenue” the authors assumed that an ideal state would be one that derives its tax revenue from “a balanced variety of sources,” meaning a combination of income, sales, property, business, and selective consumer taxes (such as excises). This is a purely political assumption, in my opinion. From an economic perspective, some taxes really are more efficient and less distorting than others. To argue that, despite this, states should seek to employ them all in a roughly equivalent fashion is to make a political judgment. Not coincidentally, it disadvantages some states right off the bat, such as Texas, Florida, and Tennessee, that have chosen not to levy a personal income tax (as well as the five states that have no retail sales tax, my preferred policy).
Other problems abound. Knowing that these state-by-state rankings would be receiving significant media attention, Governing should have made at least an attempt to use updated revenue projections rather than relying solely on three-year-old Census bureau estimates of state and local taxes. This led the North Carolina media, for example, to report without clarification Governing’s assertion that our state ranks 35th in taxes as a share of personal income, when the past two fiscal years of large state and local tax hikes have really pushed us much closer to the national average (within one-tenth of a percentage point, according to the Tax Foundation’s 2002 projections, themselves a bit dated).
And while the magazine’s introductory story admirably discussed the ins and outs of the retail sales tax, and the simplistic notion of some in North Carolina and elsewhere that “broadening” it to include services would be more efficient and fair, Governing’s rating system apparently treated as “good” a state that applied its sales tax as broadly as possible, even if the result was a double-taxation problem as goods or services purchased by businesses – such as industrial machinery or legal advice – were taxed in addition to the goods or services produced by those same businesses.
Looking down the list of states, it is remarkable that those with higher average tax burdens tend to be graded higher by Governing than those with lower average tax burdens. It is also remarkable, by the way, that American households and businesses seem not to share Governing’s fiscal policy preferences. The five states to which the magazine gave only one star (out of four) in both the “adequacy of revenue” and “fairness to taxpayers” – Alabama, Florida, Nevada, Tennessee, and Texas – experienced an average growth in population of 27 percent from 1990 to 2000 and an average growth in gross state product (GSP) of 93 percent. The six states that garnered either three or four stars in both categories – Delaware, Hawaii, New Mexico, North Dakota, South Dakota and Vermont – were hardly the barnburners of the decade, posting below-average growth rates in both population (10 percent) and GSP growth (67 percent).
Basically, the states that Governing ranked the worst in tax policy (as distinct from tax administration) grew at roughly twice the rate of the United States as a whole during the 1990s and at three times the rate of those states that Governing ranked highly. Unless you believe that people were irrationally choosing to reside and start businesses disproportionately in America’s worst-run states, the only other conclusion from these data is that the country’s premiere magazine covering state and local government has missed the boat on tax policy. This reader inclines towards the latter.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.