STUMP » Articles » Taxing Tuesday: Taxing Our Own Rich Folk Ain't Enough! Bail Us Out! » 31 July 2018, 09:13

This is one of the funniest things I’ve read recently:

Bloomberg opinion: If Rich States Need Federal Help, Remember They Paid for It

(the subhed is even funnier… but wait for it)

But before I get to that, this was somewhat in response to an earlier piece (or, actually, pieces).

NO, THE RICH STATES WON’T GET BAILED OUT

WaPo: Connecticut is drowning in debt. Should the rest of us have to pay?

A reminder about Betteridge’s Law…. the answer is usually:

NO

Now, the author of the WaPo piece, Mitch Daniels, ex-governor of Indiana and current president of Purdue University, agrees with me:

Over the past few years, several of today’s 50 states have descended into unmanageable public indebtedness. In Illinois, vendors wait months to be paid by a state government that is $30 billion in debt and one notch above junk bond status. And in terms of per capita state debt, Connecticut ranks among the worst in the nation, with unfunded liabilities amounting to $22,700 per citizen.

Each profligate state is facing its own budgetary perdition for different reasons, but most share common factors.
…..
In parallel, public pensions of sometimes grotesque levels guarantee that the fiscal strangulation will soon get much worse. In California, some retired lifeguards are receiving more than $90,000 per year. A retired university president in Oregon received $76,000 per month — and no, that’s not a typo. These are the modern-day welfare queens, and they are the reason for some of the nation’s worst budget crises. California’s pension shortfall, $250 billion under the rosiest of assumptions, is more likely close to $1 trillion.

With things this far gone, even an aroused public or a sudden eruption of statesmanship is unlikely to prevent a crash. In some states, government unions have barricaded their benefit levels behind a Maginot Line of legal and even constitutional protections.

Let’s see how strong those constitutional “protections” are when the money runs out.

More and more desperate tax increases haven’t cured the problem; it’s possible that they are making it worse. When a state pursues boneheaded policies long enough, people and businesses get up and leave, taking tax dollars with them.

….
So where is a destitute governor to turn? Sooner or later, we can anticipate pleas for nationalization of these impossible obligations. Get ready for the siren sounds of sophistry, in arguments for subsidy of the poor by the prudent.

In the blizzard of euphemisms, one can expect a clever argument might appear, likening the bailout to another important compromise of the founding period: the assumption of state debts by the new federal government. But that won’t wash. Those were debts incurred in a battle for survival and independence common to all 13 colonies, not an attempt to socialize away the consequences of individual states’ multi-decade spending sprees.

Sometime in the next few years, we are likely to go through our own version of the recent euro-zone drama with, let’s say, Connecticut in the role of Greece and maybe a larger, “too big to fail” partner such as Illinois as Italy. Adding up the number of federal legislators from the 15 or 20 fiscally weakest states, one can count something close to half the votes in the House.

The Senate — thanks to Ellsworth and Sherman — will be our theft insurance.

I knew the Senate was good for something. But I am willing to bet it won’t even fly in the House.

At least, not the current House… or even the next one.

CONNECTICUT IS SCREWED

Here is a related piece detailing how screwed Connecticut is:

Connecticut in Crisis: How inequality is paralyzing ‘America’s country club’

The state is caught in an economic straitjacket and there’s no easy way out

….. For decades, Connecticut coasted fat and happy off defense firms, insurance companies, and a handful of super-rich financiers who came for the manicured lawns and to escape the higher taxes of neighboring New York and New Jersey. But the good times have ended, and Connecticut has been caught flat-footed.

Blue chip companies like General Electric have either left or are threatening to leave. A yawning budget deficit continues to loom over the state, amplified by some of the nation’s most glaring economic inequality. Greenwich, home to hedge funders and Manhattan corporate titans, and the Norman Rockwell suburbs of Westport, New Canaan and Darien share few priorities with Hartford, New Haven and Bridgeport, gritty cities struggling with searing poverty and fiscal disaster. Connecticut’s political leaders must choose between what seem like equally rotten options: cut services, and push more burden onto the urban poor, or hike taxes, and risk repelling both the suburban rich who pay much of the freight and new businesses that might consider moving here. Put simply, Connecticut is in a bind with precious little room to maneuver.

They did it to themselves.

And I have to pay for it, because I’m foolish enough to work there and thus pay income taxes to that state.

Connecticut boasted the nation’s highest per capita income in 2017, at $70,121. From 2009 to 2015, the income of the top 1 percent in Connecticut grew by 22.9 percent while incomes for everybody else dropped by 1.8 percent, according to the Economic Policy Institute, a Washington, D.C. think tank. The institute ranks Connecticut the third most unequal state in the country, behind New York and Florida, in its most recent study.

Connecticut has a lot of extremely rich people, in both income and wealth. I would be extremely high income, personally, in any other state but Connecticut (or New York, too).

BLAST FROM THE PAST: BILLIONAIRES DON’T LEAVE PLEEEEEEEEEASE

I have written a few times before about Connecticut’s special billionaire tracker service in the government.

In any case, Connecticut is so dependent on a very few people for a large portion of their revenue, they keep extremely close tabs on those people:

“Connecticut, home to some of the richest Americans, has a big stake in the billions of dollars in revenue their income taxes generate. State tax officials track quarterly estimated payments of 100 high net-worth taxpayers and can tell when payments are down. Of that number, about a half-dozen taxpayers have an effect on revenue that’s noticed in the legislature and the state Department of Revenue Services.”
….
That is pretty bad. For one, there is an obvious opportunity for corruption. Those 5-7 people want a special deal/perk that doesn’t come out of the revenue stream? You’d better cater to their wishes.
…..
[quoting the billionaire tracker piece:] ‘The more the government relies on the super-wealthy, the more volatile that revenue is, said Sullivan, a former Democratic lawmaker. And raising taxes on the wealthy to attack income inequality has its limits, he said.

‘Tax policy, he said, should not make the state dependent on the very rich.

‘“You don’t want a system that doesn’t ask them to do their fair share,” he said, “but you don’t want a system that makes you so reliant on their fair share that if they all picked up and left tomorrow or died tomorrow you’d be screwed, as they say in the tax business.”’

That’s a nicer way than I would put it.

And remember, these people can leave, easily. Many of them own multiple homes. I like the weather up here, but not everybody likes the kind of winters we’ve been having these past 5 years.

That was from 2015. In 2016, I noted a story where a billionaire was being bried to stay in CT:

BRIBE THE BILLIONAIRES

This reminds me of the old saying — if you owe the bank $100K but have trouble paying it back, you have a problem. If you owe the bank $100 billion and have trouble paying…. the bank has a problem.

If the state has a lot of rich people/companies it can soak, and you’re a rich person concerned about taxes, you have a problem; if the state finds this revenue source drying up, it has a problem:
….
Oh look. The pensioned people outnumber the “rich”. Almost 100 billionaires in New York, and CT has to hobble along with only 12.

(Note: I’m talking about people with $1 billion in annual income, not $1 billion in wealth. These are VERY different things.)

As I note in these pieces, Texas and Florida aren’t dependent on their extremely high income people for tax revenue… because they don’t tax income.

Hmmm. That’s interesting, isn’t it?

Anyway, it is extremely easy for top tax revenue sources for CT to skedaddle to more genial climes, in literal and figurative senses. But it’s a bit harder to escape the taxing authority of the whole nation… thus the attempt to nationalize debt accrued by high-spending states.

Now I’m ready to mock the greedy rich states.

HOW DARE YOU SOAK OUR TAXPAYERS! (GIVE US MONEY)

Back to the Bloomberg piece, which I’ll link with its subhed: If Rich States Need Federal Help, Remember They Paid for It:

It would be a sign that progressive taxation has worked and should continue.

Because it has worked so well for these states, hasn’t it?

Here we go:

Yes, Connecticut is in trouble. No, it’s not going to follow the path of the Greek debt crisis.

My Bloomberg Opinion colleague Brian Chappatta recently wrote about widening credit spreads on its municipal debt, and the prospect that one day the state could default. Other states like New Jersey and Illinois have similar woes.

Mitch Daniels, president of Purdue University and former governor of Indiana, compared the state budget crisis with the European debt crisis, with Connecticut and Illinois playing the role of Greece and Italy. But this analogy gets the relationship backward. Daniels also argued that the structure of the U.S. Senate will prevent “profligate” states like Connecticut from being bailed out by others, but given the structure of U.S. taxation, it’s entirely appropriate for some of the overburdened states to get federal help.

Because it’s the federal government’s fault for the idiotic way Connecticut underfunded its pensions?

Is that going to be your argument?

Oh wait, I interrupted, let’s check the argument re: Connecticut.

First look at why Connecticut and Illinois are not the Greece and Italy of the U.S. In the euro zone, those two poorer nations have far greater debt burdens than their richest neighbor — Germany — and far lower GDP per capita. Daniels’s logic can sort of apply in Europe, where many have argued that Germany is more productive than the more-indebted members of the periphery, and should not be responsible for their financial shortcomings. (What would help resolve the imbalance, but isn’t possible given the governance structure of the European Union, would be currency adjustments.)

But Connecticut and Illinois are not poor states. Connecticut is third in GDP per capita, and Illinois is 11th, the highest in the Midwest. Last fall, the Office of the New York State Comptroller released a report looking at federal taxation by state, and it showed Connecticut paid more per capita to the federal government than any other state, and Illinois was 10th. Both states paid more to the federal government than they got back in federal spending. Daniels’s Indiana, by comparison, paid less than the national average and received more in federal spending than it paid in taxes.

And federal spending is related to state overspending…. how?

Or are you just sore-assed that the federal government deigns to tax rich people more… and so do the states… and how DARE the feds soak the same people CT is trying to soak!

Is that the logic?

This is the outcome we should expect in a progressive tax system, where richer states pay more in taxes than they get paid, with poorer states getting the opposite outcome. But it reframes the fiscal problems now plaguing these wealthier states. Yes, the pension systems of many of those “profligate” states were irresponsibly pumped up by legislators and unions. But it’s a little perverse for politicians in Indiana to be scolding Connecticut for financial troubles, when Connecticut has long subsidized the finances of Indiana.

Oh, did Connecticut’s tax revenues fund Indiana’s pensions, and that’s why CT pensions should get bailed out?

Pssst, come a little closer and let’s have a talk.

STATES DON’T PAY TAXES, PEOPLE DO

In case you missed it, it’s state residents paying federal income taxes. Not Connecticut itself.

If you would like to argue that Connecticut is paying for Indiana’s Medicaid, I would like to hear how Indiana’s Medicaid promises are more expensive than Connecticut’s Medicaid promises.

I have yet to do these “balance of states’ taxes” calculations (meaning checking individual income taxes paid, perhaps even the payroll taxes paid) against where the federal revenues go — if you’re looking at Social Security payments, that doesn’t really fund other states’ expenditures. If you’re looking at federal welfare programs… same.

I want to see money going straight to the state government, if that’s the argument you want to make.

But here’s something else: I see that this writer is using per capita measures for everything.

Recent population estimates:

CT: 3.6 million
IN: 6.7 million

Hmmm.

Back to the Bloomberg piece:

The progressive tax system of the U.S. has generally served the country well. For decades, coastal and Northern states have been wealthier and more economically developed than Southern and interior states, and transfer payments from the former to the latter have helped grow and sustain the economies of underdeveloped states. 1

That comes with this footnote:

Some of those transfer payments have been used to poach businesses and talent from wealthier states. When GE was looking to relocate its headquarters from Connecticut, Georgia competed heavily to win the relocation. It wouldn’t be a stretch to frame that situation as Connecticut having high state taxes to make up for a funding shortfall created by the state being a large net taxpayer to the federal government, GE looking to flee as a result, and Georgia using the tax money it got from Connecticut as an incentive to entice GE to move from Connecticut to Georgia.

He never details how the money got from CT to GA. What mostly happened, I’m guessing, is that tax money from CT went to direct transfer payments to individuals in Georgia, not to the state government itself.

And you can’t argue that GA itself would have stepped in to give those Georgians transfer payments, because guess what — southern states do not promise as much in welfare benefits as CT does.

So no, Georgia did not use CT money to bribe GE to come (btw, I think bribing companies like this is bad public finance policy).

Oh wait — did Georgia actually bribe GE? Looking at this informal list of tax incentives, maybe they did, (and I had to go there, because a lot of the official state websites have old/dead links… GA isn’t spending the money on cleaning up its websites, that’s for sure.)

WAIT A SEC — GE went to Boston! Heck, I think I wrote about it myself.

Yes, I did – back in January 2016:

One of the big local news pieces lately is on GE moving its headquarters to Boston:

“The world learned Wednesday that Boston beat out some 40 competitors. Chief executive Jeff Immelt trumpeted the region’s concentration of innovative companies, elite universities, and educated workforce as a place for his century-old firm to transform itself in a digital age.

“But that wasn’t all that mattered. The state’s financial stability, quality of life, and ease of travel factored into where GE would relocate hundreds of its most senior employees from suburban Fairfield, Conn.”
…..
Fairfield is right across the border from my town, North Salem. The whole northeast is an expensive location in which to site — it’s not like Boston is a low-cost, low-tax alternative to Connecticut.

But.

Let’s see what GE itself had to say:

“City and state officials are offering what could be one of the richest incentive deals in the state’s history — together valued at as much as $145 million — to lure the company here.

“But GE officials pointed to Greater Boston’s concentration of elite universities and nimble tech firms as the main draw.”

So Massachusetts, not Georgia, bribed GE to move, and it wasn’t just a calculation of tax incentives, but that Boston is a groovier place to be.

But it’s not much of an argument to say that high-tax Massachusetts (which has its own issues) should bail out high-tax Connecticut. I mean, you can argue that, but it’s tough to extend that to Georgia.

A FEW NOTES

About the author:

Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.

Well, Conor Sen. Why don’t you move to CT and become a nice little revenue source for CT yourself? Or just send a check to the state? I’m sure they’ll take it.

Seems like both Conor & I are arguing against our own interests. I say the other states shouldn’t be soaked to bail out Connecticut (where I work and pay a lot of taxes), and Conor says Georgia should be soaked (where he works … and pays not as much taxes).

I think my argument is the stronger, because look. It’s not Georgia residents’ fault that Connecticut politicians overpromised and underfunded their local pensions.

Also, because this: there are lots of pensions looking for a bailout.

John Bury has been covering the Multiemployer pension bailout campaign very well this year (keep an eye on that one!)

But we’ve also got ginormous public pensions. And Medicare. And Social Security.

(My next post is going to be on Social Security benefits – and if you are ignorant of what is actually paid, the numbers may surprise you. They didn’t surprise me.)

So Connecticut — get in line behind all those others. You are not going to make Texans (and definitely not Floridians who escaped CT) feel bad that you spent way beyond your means and want others to pay once the bill comes due.

I know CT is going to try to take a hunk of it out of me, and we’ll see if I’ll be around to take it. I probably will because I’m a sucker, but I certainly don’t think that my southern relatives should pay for my Yankee foolishness.

Final note: if the time stamp is confusing you…yes, this didn’t get posted til Wednesday, but I started it on Tuesday…… and I can always backdate posts if I want to. I also write posts ahead of time (or used to), and forward date them.

Thus, the time-traveling post. Also, Taxing Tuesday (because) must be on a Tuesday…so.