Taxes And Spending - A Study In Contrasts

As much as many have been using the financial difficulties in states like California, New Jersey, New York, and a few other states to illustrate the problems with profligate spending and over-the-top tax burdens, they are more like the extreme examples that not everyone can easily relate. So rather than repeating the same old same old, it would be better to use two other states. These two states are similar in population, demographics, and just happen to share a border. However it is the differences between these two states that may give us a better comparison for their different approaches to state spending and taxes policy.

Which two states are we talking about?

Maine and New Hampshire.

Amity Shlaes uses these two states to show how out of touch our President is when it comes to how tax policy and government spending can have an effect on the economy, positive and negative.

Even before Obama was born, some states were applying the Obama rule of “spend, even if it means higher taxes, and you will grow.” Others operated on the philosophy that less government, even perhaps in times of trouble, served their residents better.

J. Scott Moody of Public Choice Analytics, a New Hampshire public policy consultant who specializes in cross-state analysis, ran his own experiment. Moody compared Maine, a state that more than 60 years ago embarked on one path, with New Hampshire, which went a different route. Like the president, Moody favors an emphasis on the household pocketbook. He therefore spends time looking at per capita personal income of individuals.

Amity goes on to explain how both states were at parity in regards to taxes, income, and government largess back in 1946, but took divergent paths from that point on. Maine ended up adopting both a sales and income tax while New Hampshire still has neither. (The point could be made that New Hampshire does actually have one in the form of an Interest & Dividends Tax, but most folks pay neither because they don't have enough income from either to trigger the tax.)

In the end the two different paths taken have illustrated quite handily how taxes and federal largess can have an overall negative effect on the state so afflicted.

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.

In general New Hampshire hasn't suffered nearly as much from this recession as the other states in New England and the rest of the northeast. Historically, New Hampshire has fared better during recessions and recovered from them more quickly since the 1970's. Such success can be attributed to the state's low tax burden and limited government.

Unfortunately over the past 4 years the state has been inflicted with a milder form of the Tax-And-Spend disease that has plagued so many other states. Fortunately the voters have managed to hold the line at the town/city level, reining in spending and keeping property taxes in check. They are also making known their displeasure with their spendthrift legislators, seeing them for the wastrels they have become. An example: the legislature made the mistake of trying to abscond with $110 million in private funds from a state chartered medical malpractice association to help fill a ~$250 million budget deficit of their own making. Fortunately the state Supreme Court saw through the maneuver and told the state government the money wasn't theirs and to keep their hands off. That hasn't stopped the legislature from trying an end run around the Court, but the voters are quite aware of what's been going on and will likely correct the problem this coming November.

How many other states would have had their Supreme Court slap down a money grab by their legislatures? How many other states would fire the legislators trying to spend and tax their citizens money to the point where the state would no longer be attractive to businesses? Not to many, from what I can see.

So what does any of this have to do with what's been going on in Washington? Simply this: If the tax, spend, and grow the government at any cost agenda doesn't work at the state level, what makes Obama, Pelosi, and Reid think it will work at the national level? The only difference will be the number of zeroes in the size of the deficits. Unfortunately I doubt any of them will take the hint.