Hitting the Reset Button

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Indiana Governor Mitch Daniels has a provocative piece in today’s Wall Street Journal that argues that “my fellow governors and I are likely facing a permanent reduction in tax revenues.”

Daniels is running a budget surplus through close financial management and lots of innovation (e.g., the tollway deal) and reforms. In the WSJ op-ed, he has a message for Massachusetts.

The “progressive” states that built their enormous public burdens by soaking the wealthy will hit the wall first and hardest. California, which extracts more than half its income taxes from a fraction of 1% of its citizens, is extreme but hardly alone in its overreliance on a few, highly mobile taxpayers. Both individuals and businesses are fleeing soak-the-rich states already. Those who remain in high-tax states will be making few if any capital gains tax payments in the years to come. Even if the stock market comes roaring back to life, the best it could do is speed the deduction of recent losses.

Given the considerable portion of MA’s revenue stream that capital gains taxes make up, he has a point that is not on most of the State House.

Most of the time when we talk to people, even analysts, about what we can do to improve the employment picture and job growth, they often sulk and note that there aren’t any real options. Indiana and Texas seem like a world away for them, but these states hold some important lessons for us.

Sadly, the political impulse to protect government largess leads many states to aggravate their dilemma. Already more than half have raised taxes, often on businesses, serving only to chase them and their tax payments away and into the open arms of states like Indiana. Our traffic flow of interested investors is as heavy as it was in 2007. Since January we have welcomed the consolidation of more than 30 firms that closed up shop elsewhere and chose us as the low-cost, enterprise-friendly environment among their current locations.

This approach won’t solve all of our problems, because we are a higher cost state. But we need to address the cost of doing business. That starts with not increasing taxes and fees. And that means addressing the cost and size of government – doing things faster, better and cheaper.