by Robert Maynard
Several media outlets have been zeroing in on a Randy Brock ad claiming that Vermont has the highest tax rate in the country. In doing so they cite studies, which make the point that we are not actually the highest taxed state in the country. The problem with the media’s focus is that it is missing the bigger picture that the Brock campaign is trying the bring into focus. By almost any measure, Vermont is among the highest taxed states in the country and seems to be bucking a national trend among states moving to lower taxes.
There is likely a pretty good reason why Peter Shumlin and the Democrats refuse to reveal to the public how they plan to pay for ShumlinCare. They are probably wary of just how irate Vermont taxpayers may get when they are presented with the mother of all tax increases. As I mentioned in a previous TNR article, we are embarking on a course that seems to be ad odds with a national trend:
The prospect of looming record high tax hikes comes at a time when most other states in the nation are going the other way in regard to taxes. According to a Bloomberg.com story earlier this year: ”For the first time in 10 years, states cut taxes more in 2011 than they increased them, according to the National Conference of State Legislatures. The hesitancy to raise taxes is likely to carry over into 2012 as lawmakers face an election year, says Steven Roll, a state tax analyst with Bloomberg BNA.”
It is not just on taxes that we are heading in the wrong direction. Our excessive taxation is merely a symptom of a more fundamental reality that Rand Brock touched upon in the introduction to his economic proposal: “Vermont is rapidly moving away from its proud heritage of self-reliance, independence, and individualism to a state of less freedom, bigger government, greater dependence on government’s largesse and the high taxes and borrowing necessary to pay for it.” This trend that Brock pointed to was actually quantified by by Vermont economist Art Woolf in a Burlington Free Press article entitled “How We’re Doing: Government employment higher in Vermont than elsewhere“:
Compared to our population, Vermont governments employ more people than all but six other states. Over the past decade, public employment has grown much faster than Vermont’s overall population and, as the graph shows, much faster than is the case in the other 50 states combined.
In 1997, Vermont’s overall public employment wasn’t much different than the average state. Today, Vermont’s state and local governments employ significantly more people than the average state. Since a large share of government expenditures — especially at the local level—are for employee wages and benefits, a high level of government employment translates directly into a need for high tax revenues.
We are already on a greatly accelerated trajectory toward an expanded role for government and the accompanying higher taxes that are a result of following such a course. This is even before fully enacting policies like Shumlincare, which will greatly speed up this trend even further. Taking such a course is not without its consequences. In a recent Burlington Free Press article, an assistant professor of management at the University of Vermont School of Business compared the risk of doing business in Vermont to that of doing business in an “emerging market”:
I am not an expert on Vermont but I understand emerging markets. What I hear about doing business in Vermont is eerily similar to what I hear about doing business in Kazakhstan, Argentina, or Indonesia.
Businesses here talk about state policies like high corporate taxes, high energy costs, arduous permitting, and extensive regulations that make investing in Vermont unattractive. Quietly, businesses share their dismay at the revolving door of state bureaucrats in favored Vermont businesses and anti-business interest groups. It’s no surprise then to hear that businesses worry about whether the state government will simply “change its mind” on everything from their tax rates and future expansion plans to fundamental contractual terms.
She sees ideologically driven politics as playing a major role in intensifying this problem:
Let’s start with the policies. What we know from emerging markets is that capital flows to the most attractive destination. In the US, Vermont’s corporate income tax rate is the twelfth highest, and state and local property taxes are the sixth highest. In terms of energy, Vermont has one of the highest energy rates in the US. Although there is no state-level measure for business regulation and permitting, one experienced entrepreneur told me that getting a business started in Vermont requires navigating “a labyrinth of Byzantine rules.”
Vermont’s ideological politics are also at play. Existing research finds that political risk increases for business as more ideologically-motivated interest groups oppose them. Groups with ideological agendas have strongly felt preferences, tend to leverage public pressure effectively, and typically focus on politically salient or “hot” issues. In Vermont, anecdotal evidence suggests that businesses largely confront interest groups distrustful of the private sector and hostile to business interests. Environmentalist and anti-growth groups opposed the Circ-Williston highway proposal that IBM advocated. Walmart battled VNRC and buy-local groups for 18 years in St. Albans. Employee unions fought Fletcher Allen. VPIRG and NEC confronted Vermont Yankee and Entergy.
If things keep going the way they have been, the comparison of Vermont to emerging markets may not end up being fair to those emerging markets overseas. The Cato Institute recently released its “Economic Freedom of the World 2012 Annual Report“, and the results are not encouraging when it comes to America’s global competitiveness. Taken as a whole, global economic freedom is on the rise:
In the chain-linked index, average economic freedom rose from 5.30 (out of 10) in 1980 to 6.88 in 2007. It then fell for two consecutive years, resulting in a score of 6.79 in 2009 but has risen slightly to 6.83 in 2010, the most recent year available.
It appears that responses to the economic crisis have reduced economic freedom in the short term and perhaps prosperity over the long term, but the upward movement this year is encouraging.
The problem is that, while the rest of the world is on a path toward relatively more economic freedom, the U.S. is going in the other direction:
The United States, long considered the standard bearer for economic freedom among large industrial nations, has experienced a substantial decline in economic freedom during the past decade. From 1980 to 2000, the United States was generally rated the third freest economy in the world, ranking behind only Hong Kong and Singapore. After increasing steadily during the period from 1980 to 2000, the chainlinked EFW rating of the United States fell from 8.65 in 2000 to 8.21 in 2005 and 7.70 in 2010. The chain-linked ranking of the United States has fallen precipitously from second in 2000 to eighth in 2005 and 19th in 2010(unadjusted ranking of 18th).
This is a problem because numerous studies have pointed towards a correlation between economic freedom on one hand, and economic competitiveness and prosperity on the other hand.
So, we have a picture of the U.S. bucking a global trend toward more economic freedom and Vermont bucking a national trend among U.S. States toward lower taxes. This does not bode well for the prospects of Vermont’s future economic competitiveness in an increasingly global market. While this is going on, media outlets are quibbling over a Randy Brock as that may have jumped the gun a little in asserting that Vermont has the highest tax burden in the country. It may not technically be the highest yet, but it certainly seems to be heading that way.