From Washington, D.C. to Washington State, there has been a great deal of talk about the need to increase government spending to deal with the bad economy. But the thing about more unemployment assistance, more public employee benefits, more public works projects, more government employees, and more subsidies is that more government spending doesn’t come cheap and is not without consequences.
With every dollar in new spending, new revenues are needed, especially at the state level where balanced budget requirements exist. Many states have voted to increase the tax rates and some states have decided to impose new taxes on their citizens. Right now, voters in Washington State are debating Initiative 1098 (I-1098), a proposal to levy – for the first time in the state’s history – an income tax to pay for increases in government spending.
Before Evergreen State voters cast their ballots, they’d be wise to read Amity Shlaes new column that appears in the Manchester Union Leader. Her latest column describes the experiences of states that choose more government, compared to those that don’t. Amity writes that Scott Moody of Public Choice Analytics examined Maine and New Hampshire, and he made the following observations:
“At the end of World War II, Maine boasted a bigger economy and a bigger population than New Hampshire. In some other respects, the two states were similar. They were both in New England, and both were struggling with the death of old industries, such as textiles. In 1946, per-capita income was $9,610 and $9,768 for Maine and New Hampshire, respectively.”
“Moody breaks down his per-capita income figure into two components, revenue from the public sector and revenue from the private sector. Pay from governments, such as a public school teacher's pay, is included in the public-sector number along with traditional benefits.”
“Back in 1946, only 16.6 percent of what Maine residents earned or collected came from a government, federal, state or local. For New Hampshire, that rate was 18 percent. Neither state had an income tax or a sales tax. Then the divergence started.”
“Maine lawmakers argued that the general welfare would be served by a new sales tax to pay for a larger government presence, a safety net. Voters weren't so sure. In 1951, lawmakers prevailed via a trick: they appended their general sales tax to legislation for veterans' bonuses.”
“As Maine's late U.S. Sen. Edmund Muskie commented in an oral history in the Bates College archive, the sales tax, so crafted, "couldn't lose" in a vote in the legislature. Rejecting the levy would be depriving veterans, an impossibly unpatriotic act at the Cold War's height. In 1969, Maine adopted an income tax as well.”
“As early as 1945, New Hampshire signaled it would differ by adopting "Live Free or Die" as its motto. Over the decades, New Hampshire lawmakers did impose significant taxes, from levies on business and unearned income to the state's detested "view tax" -- an assessment for water-view (but not waterfront) real estate.”
“Still, the state government never burdened citizens with sales or income taxes. Overall today, Maine residents shoulder a heavier tax burden than do those of New Hampshire. State and local taxes take 12.6 percent of personal income in Maine, the sixth-highest share among states. In New Hampshire state and local taxes take 8.7 percent, putting New Hampshire at 49th for tax burden.”
“The result? Decade in, decade out, New Hampshire's economy grew faster than Maine's, so that the Granite State surpassed the Pine Tree State in 1984 and today boasts an output that is 20 percent bigger. Maine's recessions and double dips were worse than New Hampshire's. Eventually New Hampshire also won the population contest, passing Maine, in part thanks to migration. Last month, joblessness was 8.1 percent in Maine, better than Ohio but still bad, and 5.8 percent in New Hampshire.”
“Bureau of Economic Analysis data show average per-capita income for Maine in 2009 was $36,745, a bit more than Ohio. In New Hampshire, that number was $42,831, eighth highest in the nation.”
“Moody explains the disappointing performance of states like Ohio and Maine using the breakdown between public-sector and private-sector income. In 2009, the share of personal income that Maine residents took from all government was up to 36.4 percent. For Ohio, it was 32.9 percent. For New Hampshire, the figure was 24 percent. Moody's data suggest that the precious distinction between laudable civil service posts and plain old welfare doesn't hold up. Government money, smart or dumb, damps initiative.”
The moral of this story is that tax hikes and new taxes that finance more government are not a solution to a poor economy. As voters in Washington State consider I-1098, let’s hope they heed this lesson from Maine and reject a new income tax.