Indiana has started running ads that say, “Illinoised by taxes?”
It seems that some states, like Indiana, have begun to realize that tax competition may be good if you are the low-tax state.
Crain’s Chicago Business newsletter put it this way, “With Indiana and Illinois at the polar ends of the fiscal spectrum these days ... ”
The website for Indiana is about corporate tax cuts, right to work, AAA credit ratings and top rankings for this or that business poll or economic indicator.
In comparison, Illinois touts itself with “first-class work force, energy resources, unparalleled infrastructure” and quality of life.
What Illinois avoids saying is that its credit rating is likely lower than Botswana’s is, the work force is unionized, its budget deficit rivals proportionally that of California, its unfunded pension liabilities are computed in numbers used by astronomists and lousy schools with bad weather subtract from the quality of life.
Chicago and surrounding counties do get business, but Illinois is definitely losing business because businesses are expanding elsewhere and some are not even considering Illinois in the first place.
Indiana is not alone in states recognizing the need for tax competition.
Kansas passed a major tax package last year that exempts business income from Kansas income tax. It does not matter if it is a sole proprietorship, an S corporation, a partnership or a regular corporation. Tax rates on individuals are reduced along with certain deductions.
Kansas expects that tax reductions will create 20,000 jobs annually over normal growth and draw in new businesses.
Oklahoma, North Carolina, New Mexico, Nebraska and Louisiana will soon follow suit. Some states will just abolish income taxes altogether and compete with the nine states that are income tax free currently.
Recently, economist Art Laffer found that from 2002 to 2012, 62 percent of net new jobs in the United States were created in the nine states with no income tax. These states have only 20 percent of the U.S. population.
Academic and governmental studies, and Washington, D.C., seem to discount or even refute the power of tax competition.
The businesses and taxpayers who are paying “the freight” so to speak see clearly that tax on income is not just a cost, but a high-risk cash cost.
Businesses and individual taxpayers know that survival (in more ways than one) is dependent on positive cash flow and avoiding unnecessary personal and financial loss exposures.
Whether economists or various governmental tax authorities want to recognize it or not, taxes are a significant influence, if not the predominate influence, on the fiscal behavior of the taxpayer.
There are detractors from this view who argue that lowering or eliminating income tax is regressive.
That is, in effect, saying that the social purposes of taxation are more important than efficiency, equality and personal liberty.
What they mean by regressive is that everyone is taxed on consumption and not source. This cannot be regressive because if a person spends more, they pay more. It’s an equal tax that can be efficiently administered.
For those who spend less, they can save (allowing banks to increase lending) or they can invest and let capital growth work its magic.
For those who want to be in the class that has more money than they spend, the pro-growth environment gives them just that opportunity.
Income earners at all levels who are from high tax states (think New York, Massachusetts, New jersey, Illinois, California and perhaps even Minnesota) are enjoying a lifestyle in low- or no-tax states where personal liberty is the norm and government is not always threatening heavy financial penalties or to put them in jail over taxes.
Less stress from income taxes, without question, is good for your health and wealth.
More Posts by Denis Kleinfeld
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