Escaping the death spiral of Blue State taxes

Debt-ridden California needs every cent it can squeeze out of its taxpayers. The government unions that control the state through the Democratic Party are the highest paid state government employees in the nation. Despite being near the bottom in student academic achievement, California is near the top on per-pupil spending. And that $68 billion high-speed train to nowhere that the state is building in the Central Valley won’t pay for itself.

When a state appeals court recently ruled that a 19-year-old tax break for small businesses was unconstitutional, the state’s Franchise Tax Board began going after small business investors for an estimated $120 million in back taxes. “A lot of them don’t have that money anymore. Its been reinvested,” California’s National Federation of Independent Businesses Legislative Director Ken DeVore told CBS News. “It sends a message that you can’t trust government. If you comply in good faith with the rules, they can go back and penalize you.”

But a lot of California business owners knew that long ago. States like California that are Democratic Party bastions can’t afford to be hospitable to business while also funding massive public employee entitlements. So job-creating businesses flee big-government Blue States for limited-government Red States. In short order, Blue States find themselves in financial straits.

The Tax Foundation recently studied IRS data to track interstate income movements during the past decade. When a person filed a tax return in New York showing $50,000 of income, then filed a return in Florida the next year, the Tax Foundation scored it as a loss of $50,000 in income for New York and a $50,000 gain for Florida.

Using this methodology, the Tax Foundation found that between 2000 and 2010, the big Blue States of New York, California, and Illinois chased off hundreds of thousands of residents taking billions in income with them ($45.6 billion, $29.4 billion, and $20.4 billion respectively). Each of these states have highly progressive, high-marginal rate tax codes. California, for example, has 10 income tax brackets and a top rate of 13.3 percent. New York has eight brackets and an 8.82 percent top rate.

Where did all those formerly Blue State income go? To low-tax, Red State jurisdictions, including Florida (no income tax), Texas (no income tax), and Arizona (4.54 percent top rate). Those three alone raked in $67.3 billion, $17.7 billion, and $17.6 billion, respectively. Thanks to the few federalist principles that are still protected in the Constitution, Americans remain free to vote with their feet and escape economically suffocating places like California in order to move to the vastly more hospital economic climates found in Red States like Texas.

Unfortunately, there is presently no escaping the federal government, even as federal taxes calculated as a percentage of GDP are rising faster today than at any time since World War II. Unless Washington changes course, it’s anything but inconceivable that other countries will begin competing for hard-working, entrepreneurial American refugees.

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This op-ed article was published by The Washington Examiner editorial board.