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Business Observer Friday, Oct. 5, 2007 14 years ago

WALSH: REVIEW & COMMENT

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This is always true: States that cut taxes and have low taxes always do better economically.

REVIEW & COMMENT

Florida's future rides on taxes

by Matt Walsh, Editor-Publisher

This is always true: States that cut taxes and have low taxes always do better economically.

It's good that some of the media doomsters are trying to conclude that Florida's never-ending growth is ending.

That kind of gloom only can help keep the pressure on Florida's state and local elected leaders to keep cutting - not just in the margins.

You have to admit: That was quite the headline on the front page of The Wall Street Journal's Sept. 29 weekend edition: 'Is Florida Over?'

The story rehashed what many of us Floridians are growing weary of reading - truths we all know too well - the housing market blah, blah, blah;property insurance blah, blah, blah; and property taxes are killing the geese that helped lay Florida's golden eggs, our loveable snowbirds and non-resident second-home owners. And, as all these woe-is-me stories have, this one, too, trotted out the statistic that Atlas Van Lines for the first time moved more people out of Florida this past year than it moved in.

Let's just say it wasn't a story the state's chamber presidents will paste in their press-clipping scrapbooks.

Is Florida Over?

It will be if Gov. Charlie Crist gets his way. It won't be if Speaker Marco Rubio gets his way. It will be if city and county governments continue their ways. It won't be if grassroots tax-reform citizens groups continue to gain momentum. We can't wait, for instance, for this: Dr. David McKalip, a St. Petersburg neurosurgeon and one of the founders of Cut Taxes Now, is spearheading efforts for a constitutional amendment that would cap all Florida property taxes at 1.25% of assessed value. Go for it.

Truth is, this period really is unlike any other in the past 50 years of Florida's amazing growth story.

If history is a guide, though, we'll come out of this.

Go back 20 years. Florida was growing at unprecedented rates in population in the mid-1980s (see table above), and the real estate market was growing even faster, thanks to Reagan-era tax cuts. Money was easy to get, and Florida was a magnet because of its favorable tax status - no income tax, low sales tax.

Then Congress changed the real estate tax laws in 1986, throwing the commercial office and condominium industries into recession and the savings and loan industry into a death spiral. Remember the "see-through office" days? Florida suffered big time, culminating in the 1990-91 recession. During this period, from 1987 through 1991, Florida's population growth rate, in-migration and gross state product grew at their slowest levels in 20 years.

The California model - not

But we came out of it in 1992. And Florida's growth picked up the pace once again for the next seven years. In the 1990s, as the decade before, Florida was still viewed as a low-tax state vis-a-vis all of our primary feeder states - New York, New Jersey, Pennsylvania, Ohio, Michigan, Taxachusetts.

History tells us we'll come out of this real estate recession, too.

So breathe easy? Be patient? Relax?

No. Look at California. Many demographers and historians have said for a long time Florida is California, only 20 years behind.

Like Florida, the Golden State has been a growth state for as long as Florida. Its weather has drawn retirees and New Yorkers for decades.

But look what happened to California once the 1990-91 recession hit, and Californians became fed up with their Golden State becoming a high-tax state. It took California six years to regain economic momentum. As the table above shows, California experienced four consecutive years of net out-migration - more people leaving than moving in.

The California economy and population picked up momentum again in 1999 largely because of the dot.com boom and foreign immigration. But consider these nuggets:

• From 1981 to 1990, California's gross state product grew at an average annual rate of 9.24%. After the recession, with the state's tax burden high and rising, California's economy couldn't regain its previous momentum. Its gross state product from 1992 to 2000 grew an average annual rate of 5.4% - half of what it was before the recession.

• For decades in the 20th century, California attracted more affluent retirees than did Florida. Economist Richard Vedder of Ohio University says in 1957 per capita income in California was 40% higher than in Florida. But by 1997, the differential had shrunk to 4%. Florida became a much bigger attraction for affluent Northeast retirees. Vedder attributes this to no personal income tax in Florida versus "one of the highest and most progressive personal income taxes" in California. Taxes matter.

The New York model - no way

They matter a lot.

Nowhere is that more true than in the great Empire State - New York.

Everyone in the world knows New York has been a high-tax state forever. When you live in New York City, you have the extraordinary privilege - no, cruel and unusual punishment - of paying a federal income tax, state income tax and city income tax.

Well, if you need evidence of the effects of high taxes on population growth, migration and a state's economy, look at the table above for New York. It's as if people can't leave fast enough.

Professor Vedder, a leader in the study of the effects of taxation on states' economies and income, shows in his and others' studies conclusive data that rising tax burdens and high taxes irrefutably drive people away, reduce personal incomes and deaden state economies. In a 2001 study, called "Taxes and Economic Growth," Vedder examined income growth over a 20-year period in the 10-highest and 10-lowest tax states. Real total income growth was 38% higher in the 10-lowest tax states versus the 10-highest tax states.

In this same study, Vedder quotes Federal Reserve Bank and the University of Florida economists, who examined the effects of changing marginal income tax rates. Their conclusion - and it's not rocket science: "lowering taxes significantly raises economic growth."

And to buttress the New York effect - that high taxes cause people to move - Vedder examined states' migration from 1990 to 1999. He found "2,611,000 Americans net moved out of the high-tax states into the low-tax ones."

The fleeing of high-tax states has continued to grow, Vedder says. Since 2000, the average annual net out-migration from high-tax states has grown to 165,000 compared to 99,000 in the 1990s. Annual in-migration into low-tax states has average 324,000 since 2000, compared to 228,000 in the 1990s.

Keep Florida going

What more evidence do state, county and city elected officeholders need?

The days of Florida growth are not over. Florida is still a long way from having net out-migration.

But given the tax conditions - including the inequitable property-tax structure for second- and third-homeowners, commercial owners and landlords; the regulations and state involvement in property insurance (which is also a tax); and the resistance to reigning in government spending at all levels - Florida is increasingly headed in the direction of California and New York.

Policymakers can stop this with decisive action. Cap annual city, county and state governmnent spending; deregulate insurance (it worked with phones!); and give every property owner the same 3% annual cap on tax assessments.

To do nothing, or to reform only in the margins, is the sure road to decline.

STATE TAX BURDENS

Here are the 10 states with the highest state and local tax burdens and the 10 with the lowest tax burdens as a percentage of income, 2006.

10 HIGHEST TAX BURDENS

1 Maine 13.5%

2 New York 12.9

3 D.C. 12.8

4 Ohio 12.0

5 Minnesota 11.9

6 Hawaii 11.8

7 Nebraska 11.6

8 Wisconsin 11.6

9 Rhode Island 11.5

10 Connecticut 11.3

10 LOWEST TAX BURDENS

50 New Hampshire 7.3

49 Delaware 8.4

48 Tennessee 8.6

47 Alabama 8.8

46 South Dakota 9.2

45 Texas 9.4

44 Nevada 9.5

43 Montana 9.5

42 Virginia 9.5

41 Oklahoma 9.6

40 Florida 9.7

Source: Tax Foundation

EFFECTS OF RECESSION AND TAXATION ON MIGRATION AND GROSS STATE PRODUCT

FLORIDA

Growth Net Growth

Population Rate Migration in GSP

1980 10,222,857 3.88% 354,230 -

1981 10,491,106 2.62 235,220 15%

1982 10,748,180 2.45 220,718 7.8

1983 11,066,135 2.96 280,252 12.0

1984 11,405,254 3.06 296,709 13.6

1985 11,739,923 2.93 291,368 9.5

1986 12,083,010 2.92 297,190 8.6

1987 12,410,073 2.71 276,926 10.1

1988 12,723,105 2.52 256,757 9.1

1989 13,017,842 2.32 229,933 7.5

1990 13,326,534 2.37 245,642 5.7

1991 13,550,408 1.68 168,371 3.9

1992 13,803,239 1.87 202,848 5.9

1993 14,120,464 2.30 271,455 6.7

1994 14,405,457 2.02 244,848 6.6

1995 14,701,301 2.05 259,871 6.2

1996 15,011,734 2.11 272,899 6.7

1997 15,309,861 1.99 258,866 6.0

1998 15,679,863 2.42 334,225 8.6

1999 16,074,809 2.52 357,121 6.0

2000 16,413,469 2.11 297,663 6.5

Source: State of Florida

THE POST-S&L RECOVERY

Florida experienced a population boom in the mid-1980s, driven largely by the Reagan-era tax cuts. But starting in 1987, after Congress eliminated big tax breaks on real estate, the economy began to sank, leading to the S&L crisis. Florida was one of the worst-affected states, known for its see-through office buildings ande condominiums. By the 1990 and 1991 commercial-real-estate and national recession, you can see that Florida's population growth, migration and the growth in gross state product all slowed (see highlighted area from 1987-92). But notice what happened in the seven following years. Migration and economic growth rebounded (note second highlighted area). Florida still was considered then by many tax watchers, a low-tax state.

California

Growth Net Growth

Population Rate Migration in GSP

1980 23,782,000 2.3% 312,000 -

1981 24,278,000 2.1 271,000 12.6%

1982 24,805,000 2.2 278,000 6.8

1983 25,337,000 2.1 288,000 8.7

1984 25,816,000 1.9 226,000 14.1

1985 26,403,000 2.3 329,000 9.3

1986 27,052,000 2.5 369,000 7.5

1987 27,717,000 2.5 377,000 9.1

1988 28,393,000 2.4 385,000 9.3

1989 29,142,000 2.6 415,000 8.2

1990 29,828,000 2.4 316,000 7.3

1991 30,458,000 2.1 245,000 1.6

1992 30,987,000 1.7 136,000 2.2

1993 31,314,000 1.1 -23,000 1.7

1994 31,523,000 0.7 -117,000 3.5

1995 31,711,000 0.6 -135,000 5.4

1996 31,962,000 0.8 -46,000 5.5

1997 32,452,000 1.5 203,000 7.3

1998 32,862,000 1.3 120,000 5.5

1999 33,417,000 1.7 265,000 8.7

2000 34,099,000 2.0 393,000 9.0

Source: State of California

DECADE OF BOOM, DECADE OF DECLINE

California was an economic powerhouse in the 1980s, thanks in large part to the booming Silicon Valley. As the tech sector mushroomed, so did the state's in-migration. In the peak year of 1989, the state's population expanded by 750,000 people, with net in-migration of 415,000. After the 1990-1991 recession hit, California's economy struggled to recover (note highlighted years, 1990-97). At the same time, the state's tax burden rose, pushing California into the category of a high-tax state. The result: For four consecutive years, California had more people leave than move in. Not until 1999, when the dot.com boom was in full force did California resume its economic growth. In-migration peaked again in 2001, with 394,000 net migration, but since then migration has slowed, In 2006, net in-migration totaled 147,000 people. California ranked 16th in state and local tax burdens, according to the Taxpayers Network.

NEW YORK

Growth Net Growth

Population Rate Migration in GSP

1980 17,558,165 -0.4 -128,240 -

1981 17,558,616 0 -87,488 11.5

1982 17,575,543 0.9 -60,699 8.0

1983 17,670,287 0.5 14,823 8.1

1984 17,726,860 0.3 -23,932 12.1

1985 17,762,230 0.2 -49,642 7.0

1986 17,794,996 0.2 -57,486 7.6

1987 17,835,577 0.2 -55,323 7.3

1988 17,909,420 0.4 -28,623 9.2

1989 17,950,000 0.2 -72,488 4.1

1990 17,990,778 0.2 -52,469 4.5

1991 18,122,510 0.7 -29,413 0.9

1992 18,246,653 0.7 -243 4.7

1993 18,374,954 0.7 10,724 3.2

1994 18,459,470 0.4 -26,815 3.6

1995 18,524,104 0.3 -42,130 4.4

1996 18,588,460 0.3 -37,295 6.0

1997 18,656,546 0.3 -31,328 6.0

1998 18,755,906 0.5 803 2.7

1999 18,882,725 0.6 25,585 6.4

2000 18,976,821 0.5 -2,050 6.4

Source: State of New York

MOVIN' OUT

Everyone knows New York consistently has ranked among the most tax-heavy states in the nation. The Taxpayers Network in Washington, D.C., has ranked the Empire State as having the second or third highest state and local tax burdens in each of the past four years. The table above clearly demonstrates how people vote with their feet. Over the 20-year period above, New York has recorded a net increase in migration in only four years (note highlighted column). Altogether from 1980 to 2000, New York has lost 785,664 residents. Only because births outnumbered deaths has the state been able to increase population. High taxes also have affected the state's gross domestic product. From 1980 to 2000, for instance, Florida's GSP averaged 8.1% annual growth; New York's average annual growth was 6.1%.

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